The way a small business in the UK can save tax (legally!) is to engage in a proper tax optimisation strategy.
Forget any ideas of never paying any tax. It just doesn’t happen (legally).
Sure, sure, we’ve heard the rumours about “digital nomads” who spend only three months a year in a different country and so have no “permanent residence” in which to pay tax.
If you scratch the surface, you’ll find that there are risks involved in such a proposition. If such a dubious system does work for now, then it won’t work for long as the OECD (Organization for Economic Cooperation and Development) continues to tighten the clamp on tax regulations.
Besides, the life of a “digital nomad” is a life that few can sustain for any length of time. “There’s no place like home” comes to mind, especially if one has kids.
And, if you run a small business which is physically located somewhere, then that business can’t simply pack up every three months and go somewhere else.
Here are some ways to reduce your taxable footprint (legally!) and so be able to save a few pounds or more a year on your tax bill.
1. Give your children £11,500 each — tax-free
Through the utilisation of a discretionary trust, it would be possible to pay each of your children the current tax-free earning allowance of £11,500 per annum and take that income off your company’s tax bill.
Specialist advice is usually required to implement this type of vehicle, but it is 100 per cent legit and 100 per cent legal if established correctly.
Ideally, the trust would be set up in order to use the income for the children’s benefit so that you could draw all expenditure for them (such as school fees) from the trust and not from your post-tax earnings.
2. Register for VAT
If you are not registered for VAT and yet do a lot of B2B business and purchases, this is one place you can immediately start shaving off 20 per cent on your expenses.
There is more administrative burden on you because you will have to file a VAT return every quarter. But this burden has been reduced tremendously over the years as software providers like Xero, Quickbooks and FreeAgent have made it easier to prepare these returns using their tools. Goodness, you might not even need an accountant!
(Tip: You probably do need an accountant.)
3. Register your company in a lower tax-paying jurisdiction
Before you get too excited, this is not as simple as it seems. You can’t simply be a sole trader in the UK and then register your company in Romania or Hungary and think you’re going to start paying Romanian and Hungarian taxes all of a sudden!
(By the way, Romania and Hungary — as well as Lithuania, Latvia and several other developing countries — have incredibly low corporation taxes, and some of them also have very low personal taxes.)
There are a few things to keep in mind:
- Where the work is actually, physically being done.
- Corporate taxes vs personal taxes.
As for personal taxes, the rules are quite clear: You are going to pay tax wherever you are resident.
There are also withholding taxes to consider. If you are a foreign resident and start up a company in another state, there will usually be a withholding tax to be paid before any dividends find their way into your UK bank account. And that’s in addition to the UK’s own taxation of your dividends income.
Also, if your business is a physical store that sells products or does business in a specific location (e.g. a photo studio), then you will likely pay tax to the jurisdictions where the business is actually conducting business.
But! If your business operates online and is location-independent, then registering a company in a country with lower corporate taxes might mean a tremendous amount of tax savings.
The details of this are intricate, and it is something you should definitely go over with a competent small business accountant.
But it is certainly one option for saving tax in your business.
Developing countries also have the added benefit of often providing numerous incentives for businesses to invest in them.
4. Hire a competent accountant
Yeah, yeah, yeah, I hear some of you groaning. And this is not us tooting our own horn!
But the truth is that if an accountancy firm is competent at what they do, they’ll save you tax and so justify their fee completely, possibly even pay for their own fee as a result of the tax savings they bring you.
You might say to yourself, “Well, if I paid £1,000 for accounting and then the accountant saved me £1,000, what have I gained?”
You’ve gained time, and your money has gone into a business relationship that will stand you in good stead over the years.
Besides, next year, they might save you £2,000!
Shoaib Aslam is the co-founder of Pearl Chartered Accountants, a UK-based chartered accountancy firm that has multiple locations across London. They are experts in helping startups and established businesses with all aspects of growth, strategy, scaling up, accounting and tax planning.