I’m a business owner – Get me out of this!

How you are paid can have a significant impact on the amount of tax that you owe. That is why most business owners are paid via a regular salary, as well as dividends – an amount paid out from a company’s profits to shareholders.

Getting this balance right can sometimes be the difference between paying tax at the basic, higher and additional rate, as well as affecting other personal tax reliefs and National Insurance contributions.

By balancing your salary and the dividends you receive you can mitigate the amount of tax you pay.

Every taxpayer has a tax-free dividend allowance of £2,000. Any dividend income over this amount will be taxed at your marginal rate as follows:

• Basic rate – pay 8.75%
• Higher rate – 33.75%
• Additional rate – 39.35%

These rates increased by 1.25 percentage points from April 2022 as part of the Health and Social Care Levy.

Finding the right combination of salary vs dividends often relies on several factors, such as:

• Company profitability
• Personal tax liabilities
• A company’s tax arrangements
• Desire to retain state benefits.

To accumulate qualifying years for the state pension your salary must be at or above the NIC Lower Earnings Limit (currently £6,396).

If you earn more than the NIC Primary Threshold (currently £9,880 rising to £12,570 from July 2022) you will have to pay NICs from your salary.

You will start to pay income tax on your salaried earnings above the personal allowance (currently £12,570).

Given the potential tax savings on offer, you might wonder why you should get paid a salary at all. However, here are some benefits to consider:

• Accumulation of qualifying years towards your state pension
• Retaining maternity and paternity benefits
• Easier to apply for mortgages and insurance policies
• Salaries are allowable business expenses for Corporation Tax purposes
• Salaries are paid even if your business makes no profit.

Be aware, however, that drawing a salary requires both you and the company to pay NICs.

A company car can be one way of reducing your annual tax bill but they are still taxed through Benefit-In-Kind (BIK).

This classes a company vehicle as an extra taxable benefit that falls outside of your regular salary.

The latest BIK rates follow the stricter European World Harmonised Light Vehicle Test Procedure (WLTP) emission and economy tests, which means that some cars on paper will have higher CO2 (carbon dioxide) emissions, resulting in a higher rate of tax.

Companies should use the latest car tax rates to reduce their BIK liabilities by selecting lower-emitting vehicles.

The Government has set up numerous tax incentives for company car users who use electric vehicles (EVs).

It is not surprising then that more businesses have either already made the switch to EVs or are giving serious consideration to doing so. Some of these incentives include the following:

• Benefits in Kind – EVs attracted a 1% tax rate on Benefit in Kind (BIK) in 2021/22. This also applies to hybrid vehicles with emissions from 1 – 50g/km and a pure electric range of over 130 miles. This rate has increased to 2% in 2022/23, but it still makes electric and low emission cars very affordable in comparison to higher emission vehicles.
• Capital allowance – Cars with CO2 emissions of less than 50g/km are eligible for 100% first-year capital allowances. This means that electric cars can deduct the full cost from your pre-tax profits. There may be Corporation Tax to pay when the car is later sold, so this needs to be considered.
• Congestion charge exemptions – EVs are exempt from congestion charging and clean air zone (CAZ) charges. As well as London, five cities have been required by the Government to introduce a Clean Air Zone, including, Leeds, Birmingham, Nottingham, Derby and Southampton. If your company vehicle regularly travels into areas where clean air zones exist, there will be significant cost savings from switching.
• Electric charge points – Any business that installs charging points for electric vehicles between now and 31 March 2023, can claim a 100% first-year allowance for these costs through the Workplace Charging Scheme worth up to £350 per charging point.
• Electric vans – The taxable benefit for having the private use of a zero-emission van were reduced to nil from April 2021. The previous year, electric vans were taxed at 80% of the benefit for a normal van.
• Leasing – Leasing a vehicle through a VAT registered company allows you to claim back 50% of the VAT on monthly payments and up to 100% of the VAT on the maintenance agreement, which you are not allowed to do when buying a vehicle outright. But be aware that a leased EV will not qualify for the Capital Allowances mentioned above.
• Salary sacrifice – Where an electric car is provided under salary sacrifice, the optional remuneration rules do not apply.
• Tax bands for low emission vehicles – 11 new tax bands for vehicles with emissions of 75g/km and below have been introduced. The Government has also announced the tax rate for the next three years, helping businesses to plan. Electric and hybrid vehicles pay no or very little vehicle excise duty.

A director’s loan account is a method for keeping track of the transactions between you and your company.

This acts as a record of money taken out of a limited company, which isn’t:

• Salary;
• Dividend; or
• Business expense repayment.

It also accounts for any money lent to the company by you or another shareholder, which could cover the purchase of new equipment, a cash flow injection or other investments.

HM Revenue and Customs (HMRC) must be provided with a director’s loan accounts through annual company returns.

In your director’s loan account, you should record:

• Cash withdrawals and repayments you make as a director
• Personal expenses paid with company money or a company credit card
• Interest charged on any loans.

If you take more money out of the company than you put back in, the loan account can become overdrawn.

Any overdrawn amounts are considered to be assets of the company on your balance sheet until they are repaid.

If you’re a shareholder and director and you haven’t been charged interest on money you owe to your company of more than £10,000 your company must:

• Treat the loan as a ‘benefit in kind’
• Deduct Class 1 National Insurance

This must also be recorded on your tax return and may result in tax on the loan at the official rate of interest.

Therefore, money should be paid back within nine months of the end of the accounting period to prevent a significant tax bill from arising.

There are other Corporation Tax implications of an outstanding overdrawn loan account 9 months after the balance sheet date.

A balance sheet provides a statement outlining the assets of the company owners, its liabilities, such as debts, and the value of its owner’s investment referred to as shareholders’ equity.

The first section of a balance sheet records a business’s fixed assets, such as buildings, land, machinery and equipment, and current assets, which includes cash, stock and accounts receivable that have a ‘lifespan’ of one year or less.

The next section records liabilities, including long-term liabilities like money owed by the company that aren’t due to be repaid within the year, current liabilities that must be paid sooner, such as money owed to HMRC that is paid with 12 months, and accounts payable, which includes salaries and interest on loans.

The final part of the balance sheet is the shareholder equity, which will typically include:

• Share capital – The funds given in exchange for shares.
• Retained earnings – Profits earned once dividends or other distributions are paid out.

For a balance sheet to balance, total assets have to equal total liabilities plus shareholders’ equity. When combined with cash flow records and an income statement the balance sheet should form part of a business’s financial statement.

A balance sheet can give you a great deal of insight into your business and its financial health, helping you improve cash flow, manage debts or seek finance and investment.

To better understand your balance sheet there are two key ratios to consider:

• Current ratio – Current assets divided by current liabilities – This gives you a picture of how much cash you have to run operations.
• Debt-to-equity ratio – Total liabilities divided by shareholder equity – This shows you how much money the business owner needs to cover debt obligations.

There are many different approaches to improve your balance sheet and boost cash flow. Here are four common steps that all businesses should consider:

Improving debt-to-equity ratio – Reducing your debts and increasing the cash coming into your business can only strengthen your operations. You need to increase your income and use this to pay down debts. If you can’t increase income, you may need to use assets to reduce debts.

Create a cash reserve – Monitor the amount of cash held and try to build a reserve for investment or emergencies. This can be achieved by disposing of assets, increasing turnover or reducing liabilities.

Reduce cash leaving the business – Cash flow is the lifeblood of your business. If your liabilities exceed the cash being received you cannot operate and you should find a way to manage liabilities.

Strengthen credit control – Many businesses struggle with debts and late payments. These can create a lot of issues with cash flow and balance sheets. Appoint a professional to manage credit control or invest in software that can help do it for you.

Depreciation refers not only to the decrease in the value of a tangible asset but also the process of writing down the cost of the asset during its useful lifespan.

It can be useful to depreciate the value of long-term assets on a balance sheet as this can affect net income, which may have accounting and tax benefits

The method for calculating depreciation can sometimes vary between asset types, which can affect how assets are accounted for and taxed.

There are two main methods used to calculate depreciation:

• Straight-line method – This is calculated by dividing the difference between an asset’s cost and its expected salvage value by its useful lifespan. This method is easy to calculate and understand but has some drawbacks.
• Reducing balance method – This is calculated by applying a fixed percentage on the ‘book value’ of the asset each year so that the amount of depreciation each year is less than the amount provided for in the previous year. As the ‘book value’ of the asset is continually reduced from year to year it is possible to figure out the depreciation expense.

Amortisation is a method used to lower the value of a loan or an intangible asset, such as a patent, over a period of time.

Amortisation is used by lenders to calculate a loan repayment schedule based on a specific maturity date.

Meanwhile, for intangible assets, amortisation helps tie the cost of the asset to the revenues generated by the asset following the matching principle of generally accepted accounting principles.

EBITDA is Earnings Before Interest, Taxes, Depreciation, and Amortisation and is a method used to evaluate a company’s financial health and performance.

This method shows a business’s profitability from its operations before the effect of capital structure, leverage and non-cash items, such as depreciation, are accounted for.

An asset register is used to list a business’s physical resources, including the date assets were purchased, calculations of their value and identify their current location within an organisation.

Asset registers allow owners and their accounts to compare the value of the assets against their ledgers or balance sheets and calculate depreciation.

Businesses may operate more than one type of register to account for fixed tangible assets, intangible assets or even specific registers for different departments, such as an IT asset register.

Fixed assets registers can be maintained within the business’s accounting software.

The structure of your business can have a big impact on how you and your new enterprise are taxed and the obligations that you face.

Sole traders – From a legal and tax perspective you and your business are considered a single entity.

As such, you are held personally responsible for the business and its debts.

Your profits are declared via a self-assessment tax return and classed as your annual income for that year, regardless of whether you receive this as a salary or it is held in your business’s bank account.

As a sole trader, you do not have to submit information to Companies House each year, it may be easier to take money out of the business and it can be easier to set up and close your business but remember you are personally liable for the debts of your business.

Partnership – Partnership are similar to sole traders but differ in that they have more than one owner.

Under a partnership arrangement, each partner owns a specified percentage of the profits but is also liable for these profits and must pay tax on them as they are treated as income.

Each partner must complete a self-assessment tax return to record and report their income to HM Revenue & Customs.

Depending on the type of partnership formed, partners may be held personally liable for debts and other obligations.

Limited liability partnerships share many of the same characteristics of a conventional partnership, such as the internal management, tax liability and the distribution of profits, but also provide the limited liability of an incorporated company, without the same obligations.

Limited Company – Incorporating a business is a popular choice for many business owners, as the business becomes a separate legal entity entirely.

The company will be owned and controlled by those who own its shares. These shares can be owned by a single person or multiple people and can be sold to raise money for the company.

Limited companies must be registered at Companies House and have to submit annual accounts and statements under Companies House rules. They will also have certain standard legal documents that govern what they can and can’t do.

Instead of partners or owners paying tax via their tax return, Limited Companies are subject to Corporation Tax and must submit an annual Corporation Tax return which records your company’s:

• Assets
• Liabilities
• Income and expenditure
• Details of any stock on hand at the end of your financial year.

Choosing to operate as a limited company comes with significant benefits for owners and shareholders, including improved tax efficiency and reduced risk from liabilities.

It is important to carefully consider which structure suits your business and how it may affect the tax that you owe and your legal obligations.

It is possible to change your business’s structure later in its life.

Operating as a company may also add a level of credibility that you may not associate with as a sole trader.

It was previously a contractor’s responsibility to determine their IR35 status while working in the private sector, regardless of whether they were operating as a limited company or through an agency.

However, since April 2021, the duty to make this determination has shifted from the contractor operating via a personal service company (PSC) to the end client, which will typically be the engager of a contractor’s services or the recruitment agency through which they are contracted.

All medium and large businesses are now accountable for determining the IR35 status of contractors and paying the appropriate taxes and National Insurance contributions via PAYE.

Most importantly they, and not the contractor, are held liable if HM Revenue & Customs determines a contractor’s IR35 status has been incorrectly assessed.

The change does not apply if the end client is classed as a small business or the contractor is engaged through an umbrella company and is already being taxed through PAYE.

Small companies must meet two out of the three conditions below to be exempt:

• an annual turnover of less than £10.2 million
• a balance sheet total of less than £5.1 million
• fewer than 50 employees

There are three key questions for determining IR35 status:

• Are contractors directly under your control and direction or do they have autonomy?
• Do they have the right to provide a substitute in a contractual agreement?
• Is there a mutuality of obligation where you expect a worker to undertake work when asked to do so, and the worker expects to be given work constantly?

The answers to these three questions will help you establish your relationship with contractors and whether they should be deemed inside or outside of IR35.

To help employers HMRC has created the Check Employment Status for Tax (CEST), which can be found here.

Making Tax Digital (MTD) is the first stage in HM Revenues & Customs (HMRC) strategy to digitise the UK tax system.

This new tax system will require businesses to use HMRC-compliant software to submit information digitally quarterly under a phased plan, which is already underway.

HMRC believes that this new approach will help taxpayers by ensuring the information they hold is accurate and up to date.

Under this system, businesses and taxpayers will have to make additional submissions each year, as well as completing an annual final tax return as they already do.

At present, MTD has only been integrated into the VAT system, but it will eventually be phased in for all forms of taxation.

MTD will be introduced in several different phases, as follows:

Making Tax Digital for VAT

If your business is VAT registered you will need to comply with Making Tax Digital (MTD) for VAT.

Under this system you must use HMRC approved software to keep your records digitally and submit VAT returns each quarter.

An initial soft-landing period for MTD for VAT has ended, which means that businesses face potential penalties if they do not use HMRC-compliant software or process to report their VAT affairs.

Making Tax Digital for Income Tax

MTD for Income Tax Self-Assessment. will require the self-employed and landlords with annual gross business or property income above £10,000 to comply with MTD from April 2024 by recording and reporting their income using HMRC compliant software every quarter. General partnerships will also have to abide by these rules from April 2025.

If this change affects you, you will need to complete four annual submissions, plus an annual return digitally.

The Government has announced a more favourable point’s system of penalties for the late filing and late payment of tax for MTD for Income Tax Self-Assessment.

This will come into force in the tax year beginning April 2024 for the self-employed and landlords, and April 2025 for all other ITSA taxpayers, such as general partnerships.

Making Tax Digital for Corporation Tax

HMRC intends to introduce its MTD initiative into the Corporation Tax regime once it has finished rolling out the system for Income Tax but it is yet to set a firm date for its implementation.

At the moment, not much has been confirmed about this phase of MTD, as the Government is still consulting with businesses and their agents to help design an effective MTD for Corporation Tax system.

The Government will also provide businesses with an opportunity to take part in a pilot for MTD for Corporation Tax before it becomes mandatory in the years ahead.

You must use HMRC approved cloud accounting software or a set of compatible software programs that can connect to HMRC systems via its Application Programming Interface (API). The software must be able to:

• Keep records in a digital form
• Preserve digital records in a digital form
• Create a VAT or tax return from the digital records held in functional compatible software and provide HMRC with this information digitally
• Provide HMRC with VAT and tax data voluntarily
• Receive information from HMRC via the API platform that the business has complied.

We can help you find online cloud accounting software that is suited to you and your business’s needs.

If your limited company builds an office in a residential garden space owned by an employee or director it may not be eligible for capital allowances, such as the Structure & Building Allowance.

However, it might be possible to use capital allowances to reclaim some of the cost of installation for utilities, such as electrical wiring, plumbing or thermal insulations, via the Plant & Machinery Allowance.

In most cases, the main benefit is a cash one if the right circumstances can be met.

If the garden office is fixed down, then it forms part of your property. This may create Capital Gains Tax issues when you come to sell your home as it may affect how your property is classed. This may also create an issue with insurance and business rates as the office would constitute business premises.

If the garden office is not fixed down, then you could argue that if you were to move, you could take it with you, so the office does not form part of the premises. As such, you would be fine reclaiming the cost of the office from the limited company.

However, where this may fail is proving:

1. That it can be moved or dismantled without any hassle – even offices that aren’t fixed may require substantial work to be relocated.
2. It is 100 per cent for business use. This would mean using separate phone lines, internet and utilities that aren’t shared with a residential property. Separating the domestic and business items would then mean that the office is a business premise, which could lead to the same issues.

Where your garden office is purchased through your limited company, you should also consider personal usage, such as using it for storing personal items or even utilising the space for family activities.

Personal use of a garden office could restrict the allowances you can claim. It may also affect your ability to reclaim a portion of the VAT on a purchase.

The two most commonly used forms of VAT accounting are cash (based on bank receipts and payments) and accrual (based on invoices raised and received).

Using the cash accounting method, you calculate the VAT when your invoices are paid by your customers, not when they are initially raised – this ensures that you only pay VAT to HMRC once your customer has paid and settled their invoice.

However, this also means that you can only reclaim the VAT from HMRC on purchases where the supplier invoice has been paid.

This method is generally seen as an easier approach on cash flow, as cash reserves aren’t required to pay HMRC for sales not yet collected, making it ideal for smaller to medium-sized businesses.

Businesses should be aware, however, that this method of accounting is only available if taxable turnover is less than £1.35 million in the next 12 months. You must leave the scheme if your VAT taxable turnover is more than £1.6 million.

You are also not allowed to use this method of accounting if:

• You use the VAT Flat Rate Scheme – instead, the Flat Rate Scheme has its own cash-based turnover method.
• You are not up to date with your VAT Returns or payments.
• You have committed a VAT offence in the last 12 months, for example, VAT evasion.

Certain transactions are also not permissible under this method, such as where the payment terms of a VAT invoice are six months or more.

Businesses with long payment terms on their sales invoices, credit control issues or businesses, such as consultants with no real significant expenses each quarter, may benefit from using the cash basis for VAT.

This is the default option for VAT. If you use the accrual accounting method you must calculate VAT based on when the invoice was either received or issued.

This method of accounting is not concerned with when payments were received or made, which is why it is the preferred (and often required) form of accounting for larger businesses with a higher turnover.

If you intend to use this method of accounting, you should make sure that you have sufficient cash reserves to cover VAT payments to HMRC on unpaid invoices.

Businesses that typically have a VAT repayment each VAT period may wish to use the accrual-based scheme to reclaim the VAT refund more quickly.

VAT payments are typically due around five weeks after the end of the VAT quarter, so if your customers tend to pay you within two to three weeks of invoicing, the accruals scheme could be more appropriate.

Businesses need to consider which form of accounting is most suited to their business and seek advice from a qualified professional before adopting one or the other.

Directors, as well as other employees, should be able to claim tax relief for additional household costs if they are required to work from home regularly.

You may be able to claim tax relief for:

• Gas and electricity
• Metered water
• Business phone calls, including dial-up internet access.

However, you are not permitted to claim for the whole bill, just the part that relates to your work. You also cannot claim tax relief if you choose to work from home.

Under the rules, you can either claim tax relief on:

• The exact amount of extra costs you have incurred above the weekly amount with evidence, such as receipts, bills or contracts; or
• At a flat rate of up to £6 a week without evidence.

You will receive tax relief according to your marginal tax rate. For example, if you pay the basic rate of tax and claim tax relief on £6 a week, you would get £1.20 per week in tax relief (i.e., 20 per cent of £6).

You will not have to report anything or pay tax and National Insurance on a work social event, as long as it:

• Is open to all your employees
• Is annual, such as a Christmas party or summer barbecue
• Costs £150 or less per person.

These rules also apply to online or virtual parties that your business holds.

If your business operates from multiple locations, an annual event that is open to all of your staff based at one location will still be exempt.

Similarly, you can also put on separate parties for different departments, as long as all of your employees can attend one of them.

You can also hold multiple annual events, as long as the combined cost of the events is no more than £150 per head each year.

If you go over this amount then all events for that year become taxable, regardless of whether they meet the other criteria.

Businesses must have an EORI number to move goods between Great Britain and other countries. It is a mandatory part of a customs declaration and is necessary to report and pay VAT as well.

GB

Businesses need a GB EORI number to move goods between Great Britain and the EU.

If the business uses a post or parcel company, they may tell the business if it needs an EORI number, but it is best to check.

If you already have an EORI number and it does not start with GB you will need to apply for a new one here.

To apply for an Economic Operators Registration and Identification number (EORI number) you need a:

• Unique Taxpayer Reference (UTR)
• business start date and Standard Industrial Classification (SIC) code
• Government Gateway user ID and password
• VAT number and effective date of registration (if you’re VAT registered)
• National Insurance number (if you’re an individual or a sole trader).

Businesses offering services to customers in the EU and not goods, do not need an EORI number.

EU

If a business makes declarations or gets customs decisions in an EU country, it will need to get an EU EORI from the customs authority in the EU country where it is submitted.

XI

If a business moves goods into Northern Ireland or via it into the EU, then they should sign up for the Government’s Trader Support Service and acquire an ‘XI’ EORI number.

You are required to register for VAT in the UK if:

• You expect your VAT taxable turnover to be more than £85,000 in the next 30-day period; or
• Your business had a VAT taxable turnover of more than £85,000 over the last 12 months.

VAT taxable turnover is the total of everything sold that is not VAT exempt.

You might also need to register in some other cases, depending on the kinds of goods or services you sell and where you sell them.

If neither you nor your business is UK-based you must register for VAT as soon as you supply any goods and services to the UK, regardless of whether you meet the VAT threshold.

You can also apply for voluntarily if your business turnover is below £85,000. This can bring several advantages, including the ability to reclaim VAT on certain supplies. However, you must pay HMRC any VAT you owe from the date you are registered.

Most businesses can register for VAT online. This will grant you a VAT number and create a VAT online account, which will allow you to submit your VAT Returns to HM Revenue and Customs (HMRC).

You can also appoint an accountant to submit your VAT Returns and deal with HMRC on your behalf.

You should get a VAT registration certificate within 30 working days of making your submission, though it can take longer.

Your registration date is known as your ‘effective date of registration’ and you will have to pay HMRC any VAT due from this date.

Under strict accounting standards, you may be required to give a property valuation in the accounts you prepare.

If a business chooses to have its business premises disclosed at valuation, or if the property is held for investment purposes, under FRS102 1A (small companies) of FRS102 (non-small companies) regular revaluation will be necessary.

Investment property is any property (land, building, part of a building or both) held by the owner or a lessee under a finance lease to earn rentals or for capital appreciation or both.

The property is not to be used primarily for the production or supply of goods or services or for administrative purposes or sales in the ordinary course of business.

At initial recognition within a set of accounts, the investment property is measured at cost (i.e., its purchase price plus all directly attributable costs, such as legal fees).

After initial recognition, FRS 102, Section 16 applies the Fair Value Accounting Rules. This means that at each reporting date, the entity must remeasure investment property to fair value with fair value gains and losses being recorded in profit or loss.

There is no set deadline for conducting these revaluations but you should practice careful professional judgement and ensure they are carried out with sufficient regularity to ensure the amount disclosed in the accounts does not differ materially from the fair value.

The rules around property valuation and the accounting standards are complex, which is why it is best to seek professional advice.

Property may also fall under property, plant and equipment within the FRS102 rules if they do not fit the investment property criteria. This includes premises that are:

• Held for use in the production or supply of goods or services or administrative purposes; and
• Expected to be used in more than one period.

Similar rules apply in regards to the regularity of revaluation but these should be conducted using the cost model or the revaluation model.

When the revaluation model is selected it shall be applied to all items of property, plant and equipment in the same class of asset.

When the revaluation model has been selected an item of property, plant and equipment whose fair value can be measured reliably shall be carried at a revalued amount, being its fair value at the date of revaluation less any subsequent accumulated depreciation and impairment losses.

The whole class of asset must be revalued under the revaluation model to avoid people only putting forward assets that have increased and leaving out ones that have decreased.

You should seek advice on the model you intend to choose, as once it has been selected it may not be possible to switch to the other method.