Tax Efficient Business Structures

Several factors will govern the decision of your business’ structure – and tax is one of them. Tax efficiency is a significant goal to achieve for any business owner as well as the objectives of increasing margins, decreasing tax burdens and improving cash flow. Having more cash allows you to invest in your company to grow it, or you can take it for your personal use. There are many avenues to explore when implementing tax efficient structures and processes, however the safest method is to seek the help of an accountant, ensuring that each step is timed appropriately and compliant with legislation.

What are tax efficient business structures?

There are several ways to structure your business. The most important factor to consider is what type of structure will be acceptable to your clients. The more complex your firm and the larger the turnover/profit, the greater the opportunity to look at different structures to reduce your overall taxation position. Clearly, there are many commercial implications which should inform your final decision on structuring your organisation.

Business Legal Structure Set-Up

There are alternative business structures to choose from when setting up a business however each structure type has different considerations, both positives and negatives.

A quick guide to the types of business structures:

Sole Trader

The sole trader status is the most popular business structure in the UK. It is fairly simple to create a sole trader business structure and therefore there are less hurdles to get started and reduced ongoing compliance and submissions required, making it an attractive option.
However, one of the main downsides of being a sole trader is that the business and owner are treated as one and therefore any financial issues or legal disputes can cause significant personal consequences to the sole trader. There can also be a common misconception that sole trader status is not as professional as a limited company which can limit business development.

Limited Company

One of the main benefits of operating as a limited company instead of as a sole trader, is reducing the burden of liability as the business is treated as a separate entity to the business owner in law. Also, there are differences in the type of taxes that are payable.

As a limited company, corporation and dividend taxes are payable whereas a sole trader is required to pay tax on all profits above their personal tax allowance. Currently corporation tax rates are lower than sole trader rates

However, operating as a limited company brings increased business administration and necessary submissions. Some of the necessary filing requirements include; annual confirmation statements, quarterly VAT returns (if VAT registered), alongside payroll and pension requirements, if applicable. Company directors have a legal responsibility to maintain company records.

Company accounts will also be required to be completed and registered with company’s house and HMRC annually, plus arranging for corporation tax to be paid. There is also the requirement to complete and file a declaration of compliance with the pension’s regulator.

If the company employs staff, other processes and returns will be required including the payment of employment taxes, offering a workplace pension, completing PAYE returns, creation of P11Ds, as well as making provisions for statutory allowances such as sick and maternity pay.

As a director of a company, a personal tax return will also usually be required to be submitted to HMRC on an annual basis.

Partnership

Another popular business structure option is to operate as a Partnership.

This model is very similar to a sole trader in many ways. Firstly, setting up a Partnership is fairly easy and there is less compliance burden than operating as limited company.
Another similarity to sole trading, is that each partner will be individually responsible for completing a self-assessment. This keeps each partner’s financial matters separate and confidential.

With a partnership, there is the additional benefit of support from the other partners to share the business responsibilities however this also brings potential risk of disagreements. The unlimited liability issues are also consistent with a sole trader, meaning that all partners are jointly and severably responsible for debts and any legal issues that arise from trading.

How to be a tax efficient business?

There are various tax saving strategies available to reduce your overall tax liabilities. For example Your accountant should be able to advise you of when it is best for you to move from a sole trader to a limited company.

The initial set up of the company structure and ongoing analysis of the treatment of transactions, use of allowances and the timing of business decisions and resulting transactions can all impact the tax burden to your business.

Our Tax Efficient Business Accounting Services

Finance Equation can help you with the decision regarding the type of ownership to create for the business activities that you intend to carry out.

In our analysis, we look at income, capital gains, inheritance and limited company tax and how the various implications can impact you personally, as well as the business.

Our expert accountants can review your entire financial circumstances, to enable us to provide personalised advice, reducing your overall tax burdens. For example, If you are a property investor and pay tax at 40% or above, then buying a further residential property in a limited company would be an efficient business structure for you as you will get full relief on interest payments. You may also want to look at ways to incorporate your existing properties to reduce your overall liabilities.

When looking at the different types of structures to what you have to pay out, it’s important not to fall foul of the General Anti-Abuse Rule, GAAR, introduced in 2013. This rule is designed to stop abusive arrangements and avoidance schemes where the primary purpose of the transaction is not to pay tax. Our accountants will provide you with HMRC compliant solutions to help you reduce your liabilities.

If you would like support and advice on how to set up a business, make changes to a current business structure or review the financial position to reduce overhead liabilities, please contact us for a personalised, complimentary consultation.

VAT Services

All business entities are expected to pay value-added tax for transactions completed. This applies to limited companies, sole traders, partnerships, and individuals. Depending on your business’ taxable turnover, there may be regulatory VAT registrations and quarterly VAT return submissions required, increasing the administration and legislative pressures. Most VAT registered businesses must also follow the rules for Making Tax Digital, which involves electronic submission of VAT returns and compatible software. Once registered, businesses must complete VAT returns even if there is no VAT payable or to be reclaimed. The VAT rates vary depending on the industry involved and type of transaction. There are also import and export processes and charges that are applicable should your business trade internationally. The VAT rates and trading processes are often subject to change which can make calculations a very complicated task. Many people either overpay or underpay VAT, or businesses can get caught out with import taxes. Based on frequent changes in the HMRC processes plus the additional uncertainties over BREXIT legislation, it is therefore wise to have an experienced accountant to support you.

About Our Personal Tax Accountants

At Finance Equation we have over 30 years’ experience in helping business owners navigate the latest statutory requirements and we are ready to help you with your personal and company tax planning requirements.

Our award-winning team are based in Ilford, Essex, providing clients with expert services both locally and further afield with the use of amazing cloud-based systems. We can offer a perfect blend of personalised, specialist services by our dedicated team members alongside the best technology, keeping your records organised, backed up and compliant.

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Finance Equation Ltd are multi-award-winning Chartered Certified Accountants providing cutting-edge expert services to individuals, property investors, businesses and contractors.

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