This is trotted out so often that I think we forget the message. For that handful of you who do not know what it means, the letters stand for “Keep it simple stupid!”. The message is so often forgotten.
The world of tax is no different. I accept that there are those who spend time and a lot of money dreaming up tax avoidance schemes, or perhaps I should say exploiting poorly drafted tax legislation to gain an advantage. We all do it to a greater or lesser extent. Nobody likes paying tax, and if you say that you do, I am not going to believe you.
But some of the most effective tax minimising strategies are very simple and often get overlooked.
And then there are those times when you may just have to accept that you will pay more tax but your overall objective is still achieved.
There is another saying that is probably more familiar to tax people and that is “Don’t let the tax tail wag the commercial dog.” We see a lot of people desperately trying to save tax but they forget the true cost to them.
Let me give you an example. You own a profitable business and your interim management figures suggest that your profit will be higher in the current year. You don’t want to pay more tax. What do you do? You could go out and buy equipment and probably get 100% tax deduction for the cost. You have saved tax, but you have depleted your cash reserves by significantly more. If you work through a company, you currently save, at most, 24.7% of the cost in tax. The other 75.3% is a cost to you. Did you need the equipment? Will it depreciate in value by more than any economic benefit you might derive from it? If so, it would probably have been cheaper to pay the tax. If you are a sole trader or work through a partnership, the tax rates and hence tax savings might be higher, but if you do not derive sufficient economic benefit from the asset, that is you make more money, it would have been cheaper to pay the tax. So, could it have been better to pay the tax and keep the cash reserves ready for an investment opportunity if one arises?
I digress! Let’s get back to the subject of simplicity.
A simple device for minimising tax for a married couple is to put the business into joint names either through a partnership or a jointly owned company. Some people will do this without hesitation. Others do not want to share the running of the business and will in all probability pay more tax as a result. It depends on your own objectives and goals. Our business has been owned 50/50 from day one. We never thought of doing it any other way.
Then there are the simple reliefs and allowances that get overlooked. Rent a Room Relief, for example, means that someone can let a room in their own house and take in £7500 per annum tax free. That could be someone who supplements their other earnings by operating a small-scale B&B business from their home. This is tax free cash and legal!
If one person in a couple is not utilising all of their personal allowance, they can transfer a percentage to their other half provided that they are not higher rate taxpayers. It will not save you much in tax, but is simple and, as they say, every little helps.
You can save tax by paying money into a pension. As an individual, you save tax at your marginal rate. If your company pays the premiums gross into a pension, the company saves tax on the payment, but you still have the asset and it should not depreciate. If the pension that you pay into is a SSIP or SSAS then the funds are still available to the company in certain circumstances such as buying commercial property that the company can then rent from the pension. If it is a SSAS, then the funds can be used for more purposes. All simple to set up, commercially advantageous and tax efficient.
Are you using the trivial benefit rules? Employees can receive small non-cash benefits on which you get tax relief and they pay no tax. If you work through your own company, you can benefit from a trivial gift.
So, simple is best. Tax saving does not need to involve convoluted arrangements. But you probably want to talk to someone about the simple straightforward options available to you, in your particular circumstances. Give us a call!
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Alan E Long
The Long Partnership