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Kirk Rice Blog

5 Essential Tax Questions for Business OwnersWritten on September 23, 2019 by Kirk Rice LLP

5 Essential Tax Questions for Business Owners

In this blog we look at the most commonly asked business tax questions which you should consider as part of your plans. 

Here’s our top five:

1. Capital Allowances

All businesses have expenditure which is either revenue or capital in nature. Revenue is something that is immediately consumed such as a telephone bill. Capital items are where the business derives a benefit over a number of years. For instance, this could be the purchase of a computer server or laptop. Businesses don’t always get full write down of capital items in any one year.  Historically the government would have set rates over a number of years. However, in recent times, the government has wanted to encourage investment and therefore introduced the Annual Investment allowance. The current allowance is £1,000,000 which came in from January, 1 2019 and runs to the December, 31 2020. This level should be ample for most businesses. An important tip is that if you are planning some capital items into your business, then account for them sooner rather than later ,particularly before the year end of 2020 to ensure you receive the cash flow benefit of the  tax relief sooner rather than later. For more detail please download our Capital Allowances factsheet below.

2. Company Cars

This question, particularly relates to the use of company cars within Limited Companies. Being offered a company car is not the perk it once was. Government policy changed in the 1990s due to the desire to reduce CO2 emissions. The result was that company cars became expensive from a tax point of view. Essentially, the higher the Co2 emissions of the car, the more tax you pay.  Nowadays manufacturers are producing cars with low levels of Co2 emissions, which can attract a lower tax liability. It’s worth considering these vehicles and crunching the numbers. Hybrid cars in particular have low Co2 emissions and can still be fairly prestigious if that’s important to you. For instance, Porsche offer a Cayenne hybrid. It’s worth bearing in mind the government have started to increase tax charges on hybrids, but it’s certainly worth looking into. For further information please download our Cars for Employees factsheet below.

3. Profit Extraction

How a director or business owner should extract money out of their limited company is a common question. There are two options: via salary or dividends. Directors receive a salary whilst shareholders receive dividends.

In terms of salaries, they attract national insurance contributions, therefore they are generally an expensive way of extracting money from a company whereas dividends don’t. Dividends are therefore one of the reasons why people choose them over salaries. In 2016 a new dividend tax was introduced which resulted in dividends becoming more expensive. At Kirk Rice we have looked at the numbers and we know that dividends will remain the best option.

Making contributions to a pension scheme is another viable option. Finally, if the Director has invested money into the company, paying interest on the loan is a good way of extracting money from the business as it is free from national insurance. For more detail please download our Drawing Profits from a Company key guide below.

Could your business be eligible for R & D Tax relief?

The R&D Tax Relief Scheme is an HMRC incentive designed to encourage innovation and increased spending on Research and Development activities by companies operating in the UK.


4. Non-Working Spouse

If a business owner, who runs his business either through a partnership or company is doing well and making a healthy profit, then he may well be paying a lot of tax from the business income.  One option to consider is to offer a company salary to a non-working spouse. Additionally, the non-working spouse could become a shareholder of the company and receive dividends. In that way, income can be split between the family in a more tax efficient way. For further detail please download our Accessing your Company Profits key guide below.

5. Entertaining

Finally, a common question is related to how entertaining costs are treated from a tax point of view.  We are asked this question a lot. Business people want to entertain customers and suppliers, but they’re uncertain as to the tax nature of these costs. Unfortunately, entertaining costs are not tax deductible for the company. Furthermore, VAT incurred on the entertaining is not reclaimable.  However, particularly with a limited company, there is no benefit for the director or shareholder to incur these costs themselves i.e. as a taxable benefit. , it is still worth passing these costs through the company. This is particularly true if you use entertaining to generate new business.  Staff entertaining is tax deductible. If you provide staff entertainment, for instance with Christmas parties, team building and so on, these costs are accepted. You do need to be aware however that there is a £150 limit per person in a tax year so it’s important not to exceed that. For more information please take a look out our Q&A on this topic.

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Please speak to us if you would like to discuss tax implications on your business by emailing info@kirkrice.co.uk to arrange a call with one of our specialists.

Please note: information is given for general guidance only and specific advice should be taken before acting on any of the suggestions made.