Entrepreneurs tend to be wearing many different hats and your attention is likely to be on making more money, managing your team etc. Sometimes seeing your accountants can feel like a trip to the dentist. However, if you’re not talking to them, then given the complexity of UK tax rules, you might find yourself making these tax mistakes.
Here are the most common tax mistakes made by entrepreneurs given by Jonathan Amponsah, the founder and CEO of The Tax Guys.
Retrospective tax planning
You’re busy and fire fighting in the business. You make so many decisions as you go and then at the end of the year you try to piece some clever planning together even though all the events have already happened without much thought.
Unless you prepare and plan for taxes, it’s likely that you will end up paying more. Now here’s a thought. You do have some sort of a business plan even if it’s short right? How about a tax plan?
Not having proper record/poor evidence to back up claims
The rules on what expenses can/cannot be claimed are not as straight forward as you may think. Here’s an example: a business owner who rented accommodation in Scotland in order to avoid expensive hotel bills during a long business trip was denied tax relief because the evidence he submitted was not sufficient to meet the “wholly and exclusively for the purpose of trade” test.
When claiming or incurring expenses for business, ensure that the primary purpose is for the business and have all the supporting documents to back this up.
Talking about supporting documentation, keeping and collating receipts is important.
For VAT registered business owners, not keeping them is a common mistake. The next time you fail to get that VAT receipt, consider whether you will also dip into your pocket, grab those coins and throw them away.
The good news is that with so many apps on the market, the task of keeping proper tax records has become less taxing. With apps like Auto Entry, Expensify and Receipt Bank you can easily snap the receipts on the go. The technology and your accountant take care of the rest.
Wasting over £26,000 tax allowances
They say that tax allowances are like your muscles. If you don’t use them you lose them. And did you know that if you add up the income tax allowance, capital gains tax allowance, savings allowance and dividends allowance, you get a whopping £26,000 plus allowances in the year? It’s not uncommon to see many of these go to waste.
If you’re an entrepreneur who has dabbled in cryptocurrencies, make sure you make the most of the capital gains tax allowance.
And do consider how to also make use the allowances of your spouse and children.
Claiming too much use of home expenses
There is absolutely nothing wrong with claiming these expenses. The problem is that by over claiming them, you potentially end up paying a lot more in capital gains tax when you come to sell your property. Why? Because the value of your home would have gone up and you lose generous tax relief on the part of your home you turn into a business.
Missing out on these generous tax breaks
There are more tax breaks within the law that most entrepreneurs miss out on but here are the most common ones:
- Research and development
- Bad debt provision (make sure you have taken steps to recover the money)
- Capital allowances on equipment used for the business including fixtures which are part of the building you have bought
- Lease premiums
- Warranty provisions
- SEIS and EIS tax reliefs
- Entrepreneurs relief
- £40,000 lettings relief (this might be scrapped by HMRC)
The reason why most of these reliefs get missed is that you actually have to make a claim to get them.
Not putting aside money for tax
Cashflow can be a huge problem but when it comes to VAT and PAYE, the taxman’s stance is simple; it’s not your money. For income and corporation taxes, waiting until December or January to find out that you have this huge tax bill, but no funds put aside is a common mistake.
To avoid this problem, look at the business model, plan for taxes and open a separate bank account to put cash away for taxes.
Wasting Business Property Relief
Your business has value. It’s your life’s work. A common mistake I see is lack of planning around how the business should be passed-on tax-free when you’re not here. The rules, subject to some conditions, allow your life’s work to be enjoyed tax-free by your loved ones. But if you do not have a Will or if in your Will you’ve passed the business to say your spouse, you’re wasting this generous tax relief.
Accepting 30% more tax when selling your company
What happens when you decide to retire or sell your business? You may be dealing with a well-informed tax buyer who wants to pay more for the company’s assets but he or she is not interested in the shares. You’re tempted and you agree to sell the assets. You’ve potentially lost out on a 10% tax rate and are now looking at over 30% tax. Why 30%? So the company sells the assets and it pays corporation tax at, say, 19%. You then need to extract the cashout and let’s be conservative and say you pay 20% income tax. That’s 39% potential tax.
Not reviewing the business structure
Maybe, when you started, you were rightly advised to go for a sole trader, partnership or a limited company. But the rules keep changing. When was the last time you reviewed and compared different tax structures for your business?
Getting self-employment status wrong
This is a complex area and one which keeps changing. Whilst you may safely get your own status right as an entrepreneurial business owner, how confident are you that your freelance workers and associates are genuinely self-employed? HMRC is cracking down on the so-called ‘gig economy’ and are putting the onus on entrepreneurs to get this right.
Conclusion
Review your business plan and your tax situation so that you avoid making costly mistakes. As you write up your tax plan you may realise that you need some help at which point it’s good to get advice from a reputable accountant. The tax you save may well be higher than their fees.
More on small business tax/accounts and limited company tax.
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