Tax Planning Strategies to Optimise Tax Liability for Start-ups and Small Businesses

18th January 2024

For start-ups and small businesses, it is crucial to minimise expenditure at every turn to give you as many resources as possible to help with initial growth.

Ensuring that you are optimising your tax liability by making the most of any available deductions or claims is one of the most effective ways to do this, as it could free up thousands of pounds early in your business lifecycle.

Read on to find out how Edwards Accountants can use comprehensive tax planning to ensure your business benefits as much as possible.


Should you register as a limited company or sole trader?

Before looking at any specific tax reductions or deductibles, you need to understand the structure of your business, as this is a key aspect of financial management and will affect your available reliefs. Working with an accountant can help ensure you choose the optimal structure for your situation and that you are optimising your financial liabilities from day one.

The tax consequences for a limited company and for a sole trader are very different:

The situation will change as your profits increase and you or your business move up tax brackets and suffer from increased Corporation or Income Tax rates.

There is no clear right answer for everyone, and it will often depend on your personal situation. We will not be discussing the complexities of this decision at length in this blog, but it is an important consideration to be aware of.

Read our blog on business restructuring or speak to one of our tax services team to find out more about this decision!


Claiming back pre-trading expenditure

Setting up a business can be expensive, as you often incur significant sums before even trading with your first customer, such as costs for attended some form of consultancy, buying all your IT equipment in advance, or renting an office space. However, these costs could be claimed back in certain circumstances.

If you have a clear and on-record account of these purchases, you may be able to offset the expenditure against your profits or claim them back through capital allowances or VAT payments, if you are registered from day one.

Pre-trading expenses can be backdated by up to seven years and treated as though they were incurred on your first day of trading, allowing you to deduct these costs from your business profits and reduce your Corporation Tax bill. You can claim back the VAT incurred on business-related goods incurred up to four years before VAT registration, and service costs incurred up to six months before registration.

Warning: there are pros and cons to registering for VAT when you aren’t required to, but you must register within 30 days of the moment when your business turnover reaches the VAT threshold. For the 2023/24 tax year, this stands at £85,000.

Not registering for VAT can result in financial penalties, and HMRC may want to claim VAT from your business sales retrospectively – a financial cost that will come directly out of your business, not your customers.


The importance of accurate bookkeeping

VAT registration and claiming back business expenditure are just two examples of why your accounting records must be accurate from the moment you start preparing your business for trading.

Not doing so and keeping poor records could mean you miss out on valuable expenditure deductions and reliefs. Ensure all bills and receipts for relevant deductibles are sent and addressed to the business rather than your personal account, as you can reliably prove that the item was purchased to be used on the business and may be able to claim capital allowances in the UK.

Our tax consultancy and accounting experts can help set up and maintain the bookkeeping side of your business from the very start, ensuring you are always maximising available reliefs and deductions.


Remuneration for start-up founders

Starting and building your own business can leave you in a tight financial situation, especially if your business is not yet making the profits necessary to cover a full salary.

When considering how to remunerate yourself, you will need to ensure that you receive good and clear advice and that your structure is correct for your aspirations. This will depend entirely on the situation you and your business find yourselves in – for example, a limited company is often the best structure when you are looking to feed your profits back into the business for growth.

Speak to an expert to ensure you and your business can both get the most out of your available finances.


R&D tax credits for small but established businesses

A lot of the issues already mentioned affect small businesses just the same as sole traders, yet there are additional concerns that can only affect registered companies. For one, research and development (R&D) tax credits are only available to companies, which allow you to claim back a percentage of tax losses provided you are working on a qualified project.

R&D tax credits in the UK are now harder to attain due to recent changes at HMRC, meaning that qualifying projects must be within the fields of science and technology and must be proven to be a “scientific or technological uncertainty.” Businesses operating in the arts, humanities, or social sciences cannot claim R&D tax credits.

Find out more about R&D tax credits on our website and reach out to a member of our specialist R&D team today.


An independent accountant will help navigate tax complexities

Reducing your tax burden is crucial for business success and Edwards Accountants are here to help, no matter the stage of your business lifecycle or your annual profit margins.

We provide sole traders and businesses of any size with a comprehensive accountancy service, ensuring financial efficiency throughout your operations. We have specialist teams for all areas of business finance including R&D tax credits, business structure, and family investment companies.

Navigating tax efficiently is a complicated procedure and requires a level of experience that you are unlikely to have available within your business. Reach out to us today to find out exactly how we could help you!