No decent entrepreneur starts out on their business journey wanting to compromise their success on technicalities. In taking the time to establish, grow and develop an enterprise, it’s easy to want to oversee and manage anything – but few business owners have the technical skills, qualifications and know-how to do this across all areas… let alone enough hours in the day!
In truth, small business tax and financial concerns simply aren’t manageable for most business leaders; or at least, not if they’re looking to get on with the rest of the day-to-day tasks that successful business leadership involves. As a result, most business owners leave financial matters to their bank manager and only check in with them as and when required. This is not ideal for a multitude of reasons, but is unfortunately very much the norm amongst the small-medium enterprises (SME) community.
Small business tax efforts are often only focused once in a year when tax assessment is due, so without regular management, they’re easily forgotten until that time. Business consultants PWC estimate that mid-sized businesses spend 110 hours each year (equivalent to 9 days) preparing, filing and paying corporation tax, labour taxes and VAT – and that’s without factoring in specialist tax requirements.
There’s no doubt about it: small business tax management is resource-heavy and complex. The internet is full of small business tax advice but, realistically, it’s a topic that requires expert intervention and is not easily (or often, accurately) mastered by non-tax-specific business managers.
What Does Tax Compliance Actually Comprise For Small Businesses?
Every business’ tax requirements are different, because every business’ products, services, branding, and operating costs are different. All money that comes into and goes out of a business must be declared in order to remain legally compliant with tax requirements.
Tax is split into various categories and usually has variable rates. Most companies must comply with a minimum of 8 tax categories at any one time, not including industry-specific taxes.
The most common taxes are Corporation Tax (paid by limited companies), VAT, Income Tax, National Insurance and Business Rates; but there are hundreds of different tax types dependent on the size, type, industry and operations of a business. Needless to say, many do not find small business tax the easiest of areas to navigate.
Preparing and filing taxes involves having a thorough understanding of the business’ full financial picture. Once fully understood, the person filing it must then be able to comprehend exactly the amount of tax owed and be able to file the figures correctly. This submission is then reviewed by HMRC and, often, there is some back-and-forth before the final amount is agreed, legally owed and paid. The filing itself requires intricate questioning and technical points to quantify and calculate exactly how much is owed.
Businesses may also need to have their books auditing to verify accuracy, so need to remain transparent in their operations and financial management at all times, open for external auditors to enter and analyse all records.
The Ever-Changing Nature of Tax and Legal Compliance
The law is always developing in line with current affairs and issues and so, business law and the requirements that business owners need to meet develop too. This includes tax categories, guidance, and rates, which change periodically. It is important, therefore, that any business tax advice sought must be done so on a regular basis in keeping with the latest updates and changes in the sector.
Although not often considered the most dynamic of industries, finance is ever evolving and those working in financial specialisms need to keep their knowledge and skills continually updated. It’s really no wonder that the CBI found most (non-financially-qualified) business owners said that they found dealing with tax affairs ‘an uphill struggle’ when interviewed!
Governments and large business bodies may intervene in times of extraordinary change or tumult, and such guidance or change isn’t always clear. Indeed in 2020 during the coronavirus crisis, surveys showed that almost three quarters of small businesses are confused by what help or changes, if any, are on offer for them. This can result in such ‘bail-out’ or short-term security schemes being underutilised and sometimes missed entirely by those who would most benefit from them.
What’s more, small business tax requirements change as the company grows and makes more profit – and not just in terms of the amount owed. For example, if annual taxable profits hit £1.5 million, estimated tax must be paid upfront in quarterly instalments; if an investor buys more than a 25% stake in a business, it loses its eligibility for Research and Development Tax Credits. Whilst many entrepreneurs aim for their first million and their first big investment, they oftentimes don’t realise that a whole new cash flow model will need to be adopted once that happens! To be in a position to pay tax owed in advance and to not suffer unnecessarily as a result of a lost tax credit allowance, several changes need to be made. Those who have underestimated the impact of a new tax bracket or lost allowance may find themselves in a difficult financial situation and may need to divert funds from other important business focus areas; which is not conducive to business growth or development.
The Benefits of Specialist Business Tax Advice
It’s no secret that the preparation and filing of accounts and taxes is a resource-heavy job, requiring lots of time and focus – and even more so when the staff undertaking the job aren’t adequately qualified and knowledgeable in financial affairs and processes. Streamlining tax and financial procedures, by ensuring that there is a decent oversight of accounts year-round and consideration for them in all areas of business, can save a huge amount of time and effort that would be better spent on business growth.
Alongside the optimisation of the workforce by allowing them to focus on what they should be and what is most productive for the business, specialist small business tax management has financial benefits too! The primary concern with small business tax is that the company may be inadvertently accumulating arrears from unpaid or underpaid taxes that will be owed at a later date. However, there are many areas within which a business may be paying too much or the wrong type of tax that they could be, completely legally, avoiding. This is not tax avoidance as such, but simply the thorough management of financial obligations. There is no need to pay too much nor to pay too little, and both can have huge knock-on impacts to the books.
Proper small business tax management turns accounting preparations and filing into full planning – incorporating it into the everyday function of a business to ensure that processes and procedures are optimised and work in the best possible way to ‘balance the books’. This includes the implementation and management of relevant tax schemes, such as incorporation planning, capital gains mitigation, corporation tax mitigation, pensions planning, employee remuneration and profit extraction.
There is, of course, also the benefit of not under or over-paying tax through miscalculations or misunderstandings in the small business tax management processes. Either can stall operations and cause business disruption, so should be avoided at all costs.
Managing Small Business Tax Without an In-House Financial Expert
Most SMEs simply don’t have the funds to hire a full-time in-house Financial Director (FD), however much they would benefit from having one. This makes the management of small business tax affairs difficult, as there’s no one solely responsible for optimising and overseeing the job. However, this doesn’t need to be a hindrance – many companies are embracing the recruitment of a part-time FD in order to bridge the gap between niche specialist financial management and the everyday accountancy and bookkeeping needed.
A part-time FD halves the wage bill without compromising on the knowledge, experience or skill set the individual can bring to the business. Finance Equation Ltd have a plethora of the UK’s leading FD talent on their books, from enterprises and industries spanning all shapes, sizes and types. Business matters will be kept confidential, of course, but the FD will continue to work with other (non-competing or conflicting) businesses alongside the financial management of the SME. This allows for expert intervention as well as the ability for shared experiences and knowledge – and networking opportunities amongst firms that they otherwise may not have access to. The possibilities are endless!
Initially, a business review will be conducted to give a good oversight of operations and rooms for improvement and benefit. From there, the part-time FD will begin to work in the business to give the relevant business tax advice and to arrange the finances efficiently. The FD is very much part of the business and, unlike a consultant or third party, will work with and for the business owner to best help achieve the goals and objectives of the brand.
Tax inaccuracy can result in cashflow problems, legal ramifications and even the demise of a business, so it’s easy to see why proper financial management is critical. It’s not worth taking the risk; invest your time, effort and money wisely, and do things by the book.
