The Art of Tax Unplanning
We spend much of our time helping people to pay the minimum amount of tax, while always staying within the law. One of the problems is that the line between legitimate tax planning and tax evasion is broad and indistinct. Sometimes, in the absence of clear guidance it is a question of how brave do you want to be.
Leaving that aside, there are definitely occasions when saving tax will cost you money. Paying the tax is always the cheapest option. It just depends on what you are buying to cut that tax bill. Would you have bought it if you did not get any tax relief?
Here we explore some basics of Tax Unplanning. Here we plan to help you pay more tax. Read on and I will explain.
1. Don’t buy equipment
The capital allowances on equipment are still good. You can get tax relief of 100% when you buy most types of equipment (except cars). That means that you get the value of the equipment deducted from your taxable profits. In many cases that means that you spend £100 and you may save as little as£19 in tax. But, after you get the tax relief, you are still £81 out of pocket.
Therefore never buy equipment to save tax. Buy equipment that you need. Perhaps even buy it a few months early to get the tax relief in an earlier year. But never buy something you don’t need, just to save tax. You will be out of pocket and you have probably bought a depreciating asset, losing money with every passing day.
2. Don’t restrict your business to avoid hitting the VAT threshold
There are two ways to avoid registering for vat. Either keep your turnover below the vat threshold or don’t declare the excess turnover, which we would definitely not recommend. I was once asked to advise in the purchase of a B&B with a turnover (according to the seller) of £110000, but not vat registered. The buyer wanted me to tell them how not to declare the excess over the vat threshold. I declined and they went to another accountant.
I have come across people who will close 1 or 2 days every week to avoid hitting a turnover of £85000 and having to register for VAT. But that means that you are placing a ceiling on your turnover and your profits. Ultimately you can find yourself out of pocket, not only from the profits you have not made but also because of the effect it could have on the value of your business.
If your turnover hits £85000, you only need to increase it to a maximum of £102000 to put your profits back to where they were. Then any further growth puts profits in your pocket.
3. Pensions – can increase your taxes
Putting money into pensions can be a useful and effective way of saving for your retirement. You get tax relief now at your marginal rate of tax. Sounds good. However, putting more than the business can afford into a pension, just to save tax, could leave you short of working capital and in extreme case jeopardise the business itself.
This is a difficult call because you will get tax relief and you also have an enduring asset that should retain its value (unlike a piece of equipment).
Also, keep this in mind. If your trading company makes pension contributions to your scheme, it will get tax relief of 19%. When you come to take out the pension you will get a tax free lump sum but what rate of tax will you pay on the regular payments that you receive after that time.
4. Grow your business so you pay more tax
Ultimately you must decide what type and type of business you want. Some people want to work on their own, but as many will be selling their time, that limits their earning capacity. Some have had bad experiences employing staff. Join the club, it goes with the territory. But, if you want to build something significant, you have to expand. This may be because you are chasing profits but in most cases, people just like to see something grow and be able to take pride in what they have achieved, but it is never easy. If you want it easy, get a job.
There are many considerations to building a successful business. You need something to sell that has value to someone else. You need to make them aware you have that product or service (marketing) and you must persuade them to pay you (sales). You must have a means of delivering that product or service and finally, the numbers must also be right, so you can deliver the product or service and have enough profit to make the while process (and hassles) worthwhile to you.
Should you buy another business? That can accelerate your growth but it is a whole new ball game. Having said that, I would highly recommend it as a way to grow your business.
Once you have grown your business, you should be making much bigger profits, and that means more tax. But you have more money in your bank account so get over it.
We can help you structure the business to keep the tax to a minimum but if you want to make good profits, you will pay more and more tax as your profits grow. So, that is good.
5. Ultimate tax saving strategies.
If you cease trading, you will pay less tax, but you and those depending upon you will be financially worse off. Death, as far as we are aware, is also a way of avoiding paying tax. Both of these will cut your tax bills but at what cost.
There are people who depend upon you and so you have a duty to live up to that responsibility. That means earning money and most people only have two choices, employment or self-employment.
If you choose self-employment, you then decide if you will employ staff or not.
Ceasing without a financial plan in place is madness and irresponsible. But I have seen it done, so it is one option that will always be on the table. But, you will not need our services as you will not be earning enough to be paying tax.
What are you financial goals. If you need to earn enough to support your dependents or you have other needs for cash, perhaps tax saving is not the highest priority.
Whichever way you need to go, come in for a chat and we can help you chart your course, building your business, creating a cash pot and saving the right amount of tax.