A recent Small Business Tax Action Report issued by unbiased.co.uk predicts that SMEs in the UK will waste around £7.15 billion by paying unnecessary taxes. The tax system is so convoluted that busy entrepreneurs and their staff are unable to understand where they might save money that is currently going to HMRC. Only about three in five small business owners use a professional tax adviser who could prevent them paying unnecessary tax.
Benefits of Incorporation
Many sole traders, small family-owned businesses and partnerships could easily reduce their tax load by incorporating. Changing the legal status of the business by turning it into a limited company or limited liability partnership gives access to different income tax breaks and savings on national insurance contributions. According to the report, about 1.3 million businesses could benefit in this way and this is the where the highest level of wastage lies.
Benefits of Outsourcing
The next highest level of unnecessary tax lies in not outsourcing to self-employed contractors in certain business areas. As long as these people offer their services to others as well, there is no danger of them being considered disguised employees. Some current staff might welcome a move to self-employment, if they would have guaranteed work from the ex-employer at the start. Experienced members of staff at the top end of the salary scale are most likely to find this option attractive and would also save the business the most in employer’s NI contributions as well as salary, which includes sick pay, holiday pay and possible other benefits the employer has to provide.
Claiming the Benefits of Research and Development
Many SMEs are also failing to claim their research and development tax relief. This is set at 225% in the current tax year, 25% up on last year, and significantly reducing taxable income. Something like 78% of the businesses eligible to claim this actually do so. It seems a shame that it is mostly the larger enterprises which regularly employ bookkeeping professionals to deal with their tax affairs, which reap the benefit of this significant tax relief.
Authors of the Report
The aim of unbiased.co.uk is to encourage and help people to find different kinds of financial advisers, so it could be debatable whether they are unbiased. However, their research does have the ring of truth, and it could certainly be worth considering their suggestions where they might apply. Having some outsourced bookkeepers is certainly a step in the right direction.