10 essential tax tips for small business owners

Tax isn’t the most exciting part of running your own business, but it is an issue that you will have to tackle at some point.

To help you to quickly get to grips with the subject, here are some handy tax tips based on our findings of working with small businesses over the past 20 years.

1. Meet your deadlines on-time to avoid penalties

If you’re work via your own limited company, make sure you submit your paperwork ontime.

For company owners, this includes your annual accounts (to HMRC and Companies House), and Confirmation Statement.

If you are a sole trader or member of a partnership, submit your self-assessment return by 31st January each year, plus pay any tax liabilities by the same date.

If you’re a company director, or have untaxed income, you will also need to complete a personal tax return.

For all types of business, you must also submit your quarterly VAT returns, and any payroll submissions.

Even if you have the best accountant in the country, remember that – as the business owner – you are responsible for the accuracy of all submissions.

2. Keep accurate records

You are responsible for keeping accurate records at all times. Make sure you keep any paperwork in a safe place for at least six years according to HMRC.

This task is easier than ever these days, thanks to the widespread use of online accounting software (see below).

3. Make use of any allowances

Claim for all the allowances you and your business are entitled to – from capital allowances (such as the Annual Investment Allowance) to claiming small business rate relef.

4. Cloud accounting – a godsend

Cloud computing software, such as the excellent FreeAgent, is a godsend for business owners.

Not only does this type of software keep your accounts in order, but maintains a record of all of your receipts and invoices. Just in case they are needed in the future.

Software can save you hours in time, and also make your accountant’s life easier at year-end. You can access your records at any time, from anywhere.

You can link your bank accounts, and even submit your VAT and self-assessment returns from within the software front-end.

A brilliant investment for any business owner. Other popular brands include Xero and Sage One.

5. Work from home costs

If you run your business from home, you can claim tax relief.

Business cabeither claim a fixed nominal sum (£6/week or £26/month in 2023/4). Or you can claim expenses for a proportion of your home-related costs.

6. Don’t distribute unlawful dividends

If you run a limited company, you draw down profits in the form of dividends. Importantly, you must only declare dividends from retained profits.

If you extract dividends which are not allowable in your accounts, they can be challenged as unlawful by HMRC.

‘Ultra vires’ dividends can be difficult to sort-out at a later date. Your accountant may charge you for the extra work involved. You could also face penalties.

Again, if you use accounting software, you can see your tax position at any time, including how much profit can be legitimately extracted from the company.

7. The Flat Rate VAT Scheme

If you are VAT registered, ask your accountant if you would be better off using the Flat Rate VAT Scheme.

If your company is not deemed to be a ‘limited cost trader’ and can join the scheme, you benefit from a 1% cut in the fixed percentage during the first year.

The scheme was put in place to make VAT accounting simpler for small businesses.

8. Offset your business expenses against profits

Your business can offset any legitimate expenses against profits.

The way expenses are claimed is slightly different for limited companies and sole traders, but the ground rules remain the same.

Any expense claims must be legitimate – and incurred in the course of your trader. There should not be any mixed personal/business use if you cannot separate out the business element.

Read our guides to sole trader expenses and limited company expenses.

9. Put tax aside in a savings account

Aside from keeping an eye on your cashflow at all times, another golden rule of business is not spending money that isn’t yours.

This includes any funds sitting in your business bank account to settle future tax liabilities.

Why not open a separate deposit bank account and transfer any future tax liabilities at regular intervals.

After over a decade of zero rates, you can now earn over 4% interest on business savings, so it is worth exploring.

10. A good accountant is worth their weight in gold

A good accountant may become your most important advisor, and could save you money.

An accountant can help you choose the right business structure, how to extract funds tax efficiently, and claim any expenses you are entitled to.

Take your time before you choose an accountant, and ask other business owners if they have any recommendations.