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The best tax saving tips for small businesses

Tax doesn’t have to be taxing, but more often than not April brings with it a certain sense of dread to small business owners – everybody rushes to find receipts, calculate their payments, and file those all-important tax returns.

It’s not just a case of making sure HMRC has everything they need, and on time, to avoid fines; it’s also important to know what you are entitled to claim against your tax bill, and how to streamline the process to avoid tax stress come April. Many small business owners don’t know what they’re entitled to, tax-wise. For example, did you know that if your business is based from your home then you’re entitled to up to £4 a week, receipt-free, to cover expenses such as extra electricity costs? That might seem like a token sum – but think of it as £200 quid or so off your yearly tax bill, and suddenly it looks much more significant.

Here are our top tax saving tips for a smooth ride next April – and if you’ve been less frazzled by this year’s tax experience, remember it’s never too early to start planning for next year.

Expenses

Many expenses are ‘tax-deductible’ –  you can claim these against your bill at the end of the year, provided you keep all the documentation and file it correctly. The main expenses you can claim against income tax are:

Travel

Air, train, bus and taxi fares are all deductible when used for business travel. This might be travelling to meet a client or from one workplace to another, but it does not include your commute. Parking, London Congestion Charge, and tolls incurred are also included.

Subsistence

Any meals purchased during said business travel are also tax-free, but don’t go trying to claim your standard work lunch.

Hotels

Having to stay overnight on a business trip? You can claim back your hotel and any meals you ate whilst staying overnight.

One useful thing to remember when working out which of your expenses are deductible is that if you have to do it anyway then it isn’t tax-deductible – this is why you can’t claim for that sandwich you grabbed from the canteen, or the lovely pair of shoes you bought because they made you look ‘professional’.

Also, despite what films and the mass media would have you believe, entertaining is not tax-deductible, whether for business or not – so don’t go claiming for that 2005 Moet that you used to charm a client just yet.

The general rule, as laid down by the taxman himself, is that, in order to claim, ‘the expenditure must be incurred wholly, exclusively and necessarily in the performance of your duties.’

Working from home

We’ve touched on the amount you can claim for working from home without a receipt to prove it – £4 a week (a rise on £3 for the last tax year). But if you’re running a professional business from home, it’s likely you’ll need to claim more, especially if you require specialist equipment (yes – equipment is tax-deductible too!)

If you intend to claim more than this the space has to be available for HMRC to inspect, should they so wish. Utility bills (such as heating, electricity and internet) and direct property costs (like council tax) can all be partially claimed – it’s worked out relative to the proportion of your house that the office-space takes up.

But be careful – a large claim could lead to the lines between your home and your company becoming a bit too blurred. When the time comes to sell up and move on, the proportion of your house that decided your tax claim amount will be subject to Capital Gains Tax, unless it’s also used for non-work purposes. So an office that doubles up as spare bedroom is fine, but converting your basement into a workshop will incur Capital Gains Tax. See what we mean about complicated?!

Using your own transport

The standard rate for claiming back mileage on cars and vans is:

45p per mile for the first 10,000 miles (in a year)

25p per mile for every mile after 10,000 miles

You also get an additional 5p per mile if you travel with someone from the same business. And it’s not just cards you can also claim if you travel by motorcycle (24p) or, slightly bizarrely, those known gas-guzzlers bicycles (20p).

Organisation

You should know by now that a tax return requires detailed records, and you need to keep these documents for six years in case you are investigated. Now, desperately searching through the stack of receipts in your purse or in that drawer that hasn’t been emptied since before you started paying tax is not an enjoyable task. Do yourself a favour and keep on top of your record-keeping throughout the year instead of spending March in a mad panic.

Sometimes accountants will charge less outside of peak tax times, so you could always employ someone to do the hard bit before the March and April madness starts (then relax and feel smug). The ideal situation to be in is to get your tax bill filed early, at the end of the year, which gives you the time to get enough cash together for your tax bill.

Quick tax-saving tips 

  • If you own your own limited company, put your mobile phone into your company’s name. But bear in mind this doesn’t apply to smartphones and you have to discount your personal use – add your phone bill to that giant pile of paperwork, then.
  • Sole traders are viewed as individuals for tax purposes, so any money in the business account is deemed as belonging to them rather than the company, which means any interest is subject to 20% tax at the source. One way to get around this is to open a mini-cash ISA, investing up to £5640 per year, which allows the interest to grow tax free –  a great way to save for your tax bill!
  • Self-employed? Choose Class 2 National Insurance and pay it by direct debit every week – it’s only £2.75 a week and you’ll never miss a payment again.
  • On business trips you can claim Personal Incidental Payments (PIEs) worth £5 in the UK and £10 abroad to cover life’s little coffee breaks. The best part? They don’t need receipts, and you can claim meals and transport in addition.
  • Keep it in the family – employing a partner or any children over 16 but still living at home means their ‘wage’ becomes an allowable expense up to the limit of their personal allowance.