Tax Traps for SMEs and How to Avoid Them
One of the most confusing things that small business entrepreneurs have to deal with is the niggling issue of tax. Here are some helpful pointers:
Do you employ yourself?
If you’re running your business as a sole trader, you and your business are legally one and the same. You’re not an employee, you’re self-employed, consequently money you take out of the business is referred to as “drawings”, relieving you of the need to run a payroll, unless you employ staff.
Are you and your enterprise considered an entity?
If you’re running your business through a limited company, then you and your business are legally separate, which means that there are restrictions on how much cash you can relieve the company of without an extra tax burden.
The company can pay you a salary as an employee, as well as dividends on any shares you own, so long as there is enough profit to cover them. The company can also pay you back for any expenses you personally incur on the company’s behalf, but if it pays you more, you could be liable for extra tax and NI.
Could you be applicable for the VAT flat rate scheme?
The VAT flat rate scheme is designed to save you time and could also save you money. You have to apply to join, and then be accepted by HMRC before you can start using it.
You will have to update your accounting software’s VAT settings once HMRC have accepted your application, but not until!
Tax relief on motoring costs
Remember if you’re claiming HMRC’s set rate of 45p or 25p per mile that you travel on business journeys in your own car, this covers all the costs of buying and running the vehicle, therefore, in your accounts, you can’t claim for the costs of petrol or repairs, similarly, you can’t claim capital allowances against the cars purchase.
The only other motoring costs alowable when you’re using the mileage method are those that relate to a particular journey, such as road tolls or car parking fees.
There is nothing in the water!
If you’re working from home, it’s possible to claim a percentage of your home running costs in your accounts, but one thing you can’t include is any water. Although you can if your business incurs copious amounts of essential usage, that must be supplied by a separate pipe from your domestic supply, such as a laundry service, hairdressing or dog grooming.
Claiming too much for food and drink
HMRC says that, because everyone must eat in order to live, food and drink by its nature are partly personal costs and will only allow you to claim for food and drink in certain circumstances.
If you run a limited company, you can claim the cost of food and drink when you’re out and about on business. The rules are stricter for sole traders, whereby, you can only claim the cost of food and drink if you’re out and about and away overnight, the journey is extraneous to your normal practices, or your business is itinerant by nature spending short periods of time at varying sites.
VAT on business entertaining vs. staff entertaining
Don’t make the mistake of treating individuals, including subcontractors, as employees, entertaining customers and other business contacts is part of business life, and HMRC rarely accepts this it as necessary. Claiming VAT on the cost of entertaining anyone other than bona fide, current employees of your business won’t be allowed.
Get the timing right
It’s important to keep a correct record of the business income, so that you don’t risk penalties for late tax payment.
If you’re using the cash basis of accounting, you’d include your income when your customer paid you for it; otherwise, you count income from when you do the work or provide the service, regardless of the invoice, or payment date.
Remember, as always, if there’s anything you’re unsure about; seek the help of an accredited accountant who will help keep you and your concern from falling into the slough of despond!
