Common Business Tax Mistakes to Avoid

Common Business Tax Mistakes to Avoid

Set out below are some of the mistakes that many businesses have already made, so that you don’t have to…

If I HAD to pay for It, it MUST be allowable

They don’t come more classic than this. Typically, it will be self-employed training costs, or some kind of certification or accreditation, which the trader assumes to be deductible because he or she would not be able to ply the trade or profession without it.

This is an involved area of tax, but the basic idea is that, for expenses to be allowable, they must be incurred in the earning of particular profits, or income of a period of assessment. So, an annual licence or certification that must be renewed periodically may be set against annual income. But a qualification that ‘lasts’ for a lifetime is an ‘enduring asset’ and is not consumed over a year or two, so the cost of acquiring it is not deductible against any given profits, or period of assessment.

While this trap does not apply only to training (it could, for example, be some kind of safety or quality accreditation that lasts indefinitely) the approach to self-employed training, as per HMRC’s Business Income manual (at BIM35660), may be contrasted with the more permissive regime that applies to that for training employees (as at BIM47080). It should also be noted that the case Dass v Special Commissioner and others [2006] EWHC 2491 (Ch) usually adopted by HMRC is not without its detractors.

The corporation tax treatment can vary significantly to that set out above for self-employed businesses subject to income tax. There are special corporate regimes that override those principles, such as loan relationships, and the corporate intangibles regime, that do NOT so rigidly distinguish between short-term and long-term expenditure.

The government is currently consulting on whether tax relief for personal training should be specifically endorsed by a change in the legislation, so as to encourage the development of a more knowledgeable workforce at the national level.

Can you claim too much?

One might say that HMRC spends most of its time assuming everyone claims too much, otherwise there wouldn’t be a ‘tax gap’. Of course, that is overly simplistic, but small self-employed businesses can run the risk of inefficient expenditure management, typically where profits are so low that any additional relief is wasted against tax-free personal allowances, or almost wasted against lower-than-usual tax rates. Ideally, expenses can be shunted into the next period if they are likely to be wasted.

Of course, it is not always possible to ‘manage’ expenditure; sometimes there is simply no choice as to when it must be incurred. And it isn’t always obvious that they are at risk of being wasted. Here, capital allowances are your friend; they can be disclaimed in any amount, so you can claim as much or as little as you choose – and you can decide sometime after the profits have been cast.

Company cars and fuel

Many years ago, the tax regime for assessing employees to a ‘benefit-in-kind’ tax charge for the private use (or availability) of a car and fuel was fairly modest – particularly where the employee could demonstrate a genuine business need for a car by racking up more than 18,000 business miles in a tax year. The regime changed to scale the charge according to the car’s official CO2 emissions, without regard to whether or not the car was necessary or simply a ‘perk’ and has ratcheted up considerably over the years since. Whilst the benefit chargeable for a car being made available for private use can still be cheaper for the employee than running a vehicle personally, the private fuel charge is all but prohibitive.

Businesses should keep an eye on the increasing real cost of company cars (and fuel where still made available) to ensure that it remains worthwhile.

Director’s account with the company

Self-employed people are taxed on their profits. The business profits and cash belong to the trader, and it is an accounting device to pretend that they ‘belong’ to the business (to aid monitoring the overall performance of the business).

A company’s profits and cash belong first to that company, and shareholders can then transfer that wealth into their personal possession only by authorising dividends, or similar. This is often a problem for people when they incorporate their business, as they are unfamiliar with the change in approach. Actually, it can sometimes be a problem for people who have run their own business through a company for years.

Managed properly, using company funds can be tax-efficient and relatively straightforward. But if a director/shareholder ends up owing money to the company and cannot pay it back relatively quickly (i.e. months, rather than years), then it can become expensive to unwind – both for the company and for the director/shareholder, with potentially significant exposure to:

  • a charge to corporation tax on the company under the ‘loans to participators’ regime (CTA 2010, s 455);
  • a benefit-in-kind tax charge for the use of the company’s money if no interest has been paid on the borrowings (under ITEPA 2003, Pt 3, Ch 7); and

a charge to National Insurance contributions as advances on salary.

Neglecting to check with a tax adviser first…

For a tax adviser, hindsight is a wonderful thing. It is also a bane. Anything involving buying, selling, or overhauling a property should be run past your adviser first.

For example, having earlier said that capital allowances can be your friend when fine-tuning your business expenses, they can rapidly fall out of favour if a joint election has NOT been made to identify (and have pooled) eligible fixtures in a commercial property, after you have bought it. Both vendor and buyer must sign, but it is the buyer’s problem – and that of any subsequent buyer – if there is no election, because it can block a capital allowances claim on any fixtures in the building on that purchase. While there is a theoretical two-year time limit to making the election, there is usually no benefit to the vendor in making further accommodation, once the property has been sold. Depending on the property’s ownership history, this may not block all categories of fixture, but it will almost certainly block some.

VAT and property can be particularly problematic; neglecting to opt to tax a property that is no longer used in a VAT-registered business and is then let out can result in a partial clawback of any VAT claimed on acquisition and ongoing partial exemption issues if the property is let out, but that pales when compared to an outright sale, if still subject to the capital goods Scheme.

When buying, it is useful to know when the ‘transfer of a going concern’ (TOGC) rules can be applied to switch off any VAT on the transaction – SDLT is chargeable on the VAT-inclusive price, so removing the property from VAT altogether can make for a reasonable and permanent tax saving. In other respects, it may be preferable to switch off TOGC treatment deliberately – contrary to popular belief, it is not an election but is mandatory unless the transfer fails the criteria (hopefully on purpose).

It isn’t just property, of course; much the same could be said for choosing which kind of business vehicle suits a new commercial venture or structuring a significant new deal.

Practical Tip:

It will surprise few readers that I might suggest it is a mistake to undertake a significant business decision without consulting with one’s tax adviser beforehand. Perhaps the biggest mistake is to assume that there is any discernible logic in tax. Logic there may be, but it is applied sparingly at best.

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