However, none of this precludes a business from doing whatever it can to lawfully become tax efficient. And to understand what firms should be considering, Printweek took advice from two experts in the accounting profession, seeking their tips for lowering tax bills and keeping on the right side of HMRC.

The Association of Taxation Technicians

Remuneration planning

David Wright, a technical officer at the Association of Taxation Technicians, starts with remuneration planning.

As a business grows, incorporation may be tax-efficient as there are lower rates of corporation tax compared to income tax. However, as he points out, “the downside is that this introduces a second layer of taxation – corporation tax is due by the company and then personal taxes are payable on extracting profits to the owner”.

Of course, a corporate structure allows control over how much of income the owner is taxable on, allowing them to maximise use of their lower rate tax bands each year. And for Wright this can be especially valuable in the event of business profits fluctuating as “it allows profits to be kept within the company in good years to reduce the owner’s exposure to the top rates of income tax. By comparison, a sole trader would be liable to tax on a bumper year’s profits in full”. He also points out that if the company has lean years the owner may still be able to extract company reserves as salary and dividend to make use of their personal tax allowances and basic rate tax band.

Wright does caveat his comments: “Unlike dividends, salaries are an allowable expense when calculating a company’s taxable profits, so it may appear sensible to remunerate the owner with just salary. However, National Insurance Contributions (NICs) apply to salaries for both the company and the recipient.” Also, dividends are not subject to NICs, and the recipient pays lower tax rates than they do on salary, which is why he says that “there is a balancing act between the two”.

It shouldn’t be forgotten that NICs provide for future state pension entitlement along with other state benefits. For this reason, Wright suggests paying salary equivalent to at least the Secondary Threshold (£9,100) to ensure a year ‘counts’ for state pension contributions, but probably no more than the personal allowance (£12,570) above which PAYE starts to be incurred.

Tax-efficient perks

Benefits appeal to employees and done correctly, non-cash remuneration from a company can be highly tax-efficient. Unfortunately, Wright warns that this doesn’t apply to owner of sole traders or partnerships but does for any employees they take on.

In more detail, he says that certain benefits in kind such as employer pension contributions, providing one mobile phone per employee, and free staff canteens can be provided tax-free. Also, staff events such as an annual Christmas party or other such function can also be laid on tax-free as long as the total cost for all events in the year does not exceed £150 per head with the costs also claimed against the company’s taxable profits.

Cars have for years been targeted by HMRC and as Wright points out: “Electric cars can no longer be provided tax-free to employees – but until April 2025 they only attract a benefit in kind charge based on 2% of the list price.” This means, for example, a £50,000 electric car will result in a £200 annual tax charge for a basic rate taxpayer, or £400 for a higher rate taxpayer. Further, if the business leases the car, those costs can be claimed when calculating the business’ taxable trading profits – and says Wright: “If the business buys the car outright, the full purchase cost can be claimed in the year of purchase, as long as this is before 31 March 2025.”

Salary sacrifice pension contributions are another tax efficient option for Wright. Here he says that “if an employee gives up part of their gross salary, the employer can pay that amount into a pension scheme on the employee’s behalf, saving tax for the employee and NIC for both the employee and the employer”.

Finally, there’s the ‘trivial benefits’ rule where rewards valued at up to £50 each can be provided tax-free to employees as long as they are not a reward for services and are not cash or cash-equivalent vouchers. Wright warns here that directors are generally limited to £300 of trivial benefits per tax year.

The long term

Last for Wright, is thinking about exit strategy for those looking to sell up. This is because he says that a Capital Gains Tax (CGT) charge is likely to apply, with rates of up to 20% on the growth in the business value. However, he says that “if you structure your business so it qualifies for Business Asset Disposal Relief you could access a 10% CGT rate on up to £1m of capital gains”.

And then there’s Inheritance Tax (IHT). As Wright outlines, a trading business can often qualify for 100% relief from IHT thanks to Business Property Relief (BPR), which can provide a huge tax saving if the business is to be passed on. But Wright warns that those that don’t structure the business carefully may miss out. He gives an example: where premises from which the business trades are owned personally rather than held in the business, any BPR available on their value will be capped at 50%.

BHP LLP

Get good advisors

Kieron Batham-Tomkins, tax senior manager at BHP, recognises that he is biased. However, he says that not using the right advisors “that will keep you abreast of up-to-date legislation in an ever-evolving world of tax is where you can fall behind and end up paying more tax than is required”.

Batham-Tomkins also recognises that it is important to remember that there is no one-size-fits-all solution and that a tailored approach is particularly important as is planning for the future as early as possible. He’s keen to emphasise the value of a professionally qualified advisor. This is because they are “obliged to undertake continuous professional development and keep up to date with the latest laws and regulations in order to maintain membership of the relevant professional body”. 

He continues: “This gives confidence that compliance work is being done by those with up-to-date knowledge and therefore should hopefully reduce the likelihood of an HMRC enquiry.”

Of course, HMRC has the right to enquire into tax affairs regardless of whether an advisor is used or not. But as Batham-Tomkins reiterates, “you have to think that undertaking your own tax work without a qualified advisor involved puts you higher up the risk register for being enquired into”. Indeed, there is a specific question on tax returns which asks if an advisor has been used to help prepare the return; this is asked for a reason.

It needs to be remembered that there’s is nothing in law to stop an individual calling themselves a tax advisor or accountant; they just cannot use letters after their name, or use the words ‘chartered’ or ‘certified’.

Separation of monies

Batham-Tomkins has a real issue with businesses not separating business and personal monies. He says that “buying something with a company credit card does not automatically make it a company expense”.

It’s natural that for smaller businesses, or those in the early stages, to find it hard for owner managers to distinguish between what is business and what is personal, especially for sole traders that have subsequently incorporated. Even so, he says: “The best advice I can give is that, as early as possible, make sure that a separate bank account is set up and that all business transactions (both income and expenditure) are processed through the business bank account. If you do have personal expenditure, where possible, pay for this personally and then reclaim from the company and keep the audit trail.” In his view, this will save so much time when it comes to preparing accounts and tax returns and save the need to unpick the jigsaw of what are and aren’t personal monies.

Plant and equipment

When it comes to investing in machinery, Batham-Tomkins’ initial response is that firms should make purely commercial decisions: “If they were never going to buy plant and machinery, or any other asset for that purpose, then it is highly unlikely that any tax relief available will make buying it worthwhile.”

That said, plant and equipment is generally more tax deductible when it comes to capital allowances as since April 2023 a ‘Full-Expensing’ regime is in place. Here Batham-Tomkins explains that this means that firms can “expense the full cost – with no maximum – on the cost of brand-new plant and equipment, including commercial vehicles, which is brand new and not acquired for leasing”. On top of that he notes that even with Full-Expensing, firms can still access £1m of Annual Investment Allowance. This allows a 100% write-off of secondhand plant and machinery and also items termed ‘integral features’ such as those built into the fabric of a building.

But when it comes to purchasing assets Batham-Tomkins says to think about the timing of those purchases around the year end. His advice is that “where possible to pull the expenditure into an earlier accounting period as it is likely to speed up the tax relief being achieved”. However, another complication that he highlights is that since April 2023, “different corporation tax rates apply where some profits can effectively be taxed at up to 26.5%”. This is why he says that “timing your expenditure for relief against profits being taxed at the highest rates is also good tax planning.”

Cars

Finally, on to cars, Batham-Tomkins says that firms should seek to obtain better capital allowances treatments as they cannot use either Full-Expenses or Annual Investment Allowance. As a result, he says that “they are relieved at 100%, 18% per annum or 6% per annum depending on the level of CO2 emissions”.

He notes that electric cars which are brand new and have 0g/km CO2 emissions can currently obtain 100% first year allowances, whist electric cars that aren’t brand new or cars which have emissions above 0g/km and up to 50g/km get placed in the general pool at 18% per annum. Anything above 50g/km are then entered into the special rate pool at 6% per annum.

In other words, Batham-Tomkins says to “choose vehicles wisely.”

Summary

Tax is an obligation on us all, but it doesn’t, as the HMRC advert notes, need to be taxing. The key is good advice, from a regulated professional and not automatically following a course of action just because it’s tax efficient. 

Case study: Eight Days a Week Print Solutions

Lance Hill, managing director at Eight Days a Week Print Solutions (EDWPS), says that tax advice altered his thinking when expanding, especially when investing in new plant and equipment. As he explains, with “the super-deduction of 130% capital allowance, it made more sense to put our £120,000 enclosing machine on our main balance sheet rather than into our holding company”. He says that advice also led to a change in director renumeration following rules changes around dividends and corporation tax.

 In more detail, he says of the super-deduction, which ended in March 2023, “it was a positive benefit for investment in new equipment at a time when it was economically challenging”.

He adds that the company used to pay directors a low basic salary via PAYE then top up with dividends which was more tax efficient. But since the rules changed, along with the increase in corporation tax he says, “it was more efficient, for both the business and the directors, to return to full PAYE”.

Rewarding staff

EDWPS uses the tax system to reward staff and is currently looking at vouchers. Hill says that the company currently gives staff an annual profit-related bonus, free charging for those with electric or hybrid vehicles, and also a salary sacrifice scheme, as well as a cycle to work scheme. 

Staff don’t feed into the rewards process. Rather, Hill looks for various ways to reward staff for performance in a tax efficient way. As he comments: “I’ve spent a lot of time exploring the options and different schemes based on what is out there in the market and also what is relatively easy to administer. The ultimate goal is to retain our staff and attract new talent, so we need to have a competitive and compelling package of benefits to achieve this.”

The tax burden has made a difference to both the business and staff says Hill: “Our costs have gone up a lot this year and with corporation tax increasing I will be looking closely at surplus cash at the end of the year to reduce the tax outlay next year as it makes my blood boil.” He’s bothered that “we are getting penalised for being successful, employing more people, investing and developing our sustainability credentials and contributing to the local economy”.

It’s worth noting that EDWPS’ company accountant has been very proactive on advising on tax efficiency across all aspects of the business. Beyond that Hill says that “I generally sense check any major decisions with our accountants in case there are any tax implications or opportunities I am not aware of”.

The accountant’s service is broad. Hill says that “they have been very supportive, including the set-up of our new division, Eight Plus last year which factored in tax efficiencies around shareholding”. On this he points out that in gifting shares to co-founders at the beginning there were tax implications and sound advice was needed to use schemes that met with HMRC’s approval.