Page last updated at 23:33 GMT, Tuesday, 11 November 2008

Tax savings for small businesses

Money Talk
By Penny Bates
Menzies chartered accountants

Penny Bates
Penny Bates

Many small businesses will be, or may shortly be, experiencing cash flow difficulties due to the current economic climate.

But there are some simple tax points to bear in mind which could help ease those cash flow problems.

Here are a few of the ways available to take advantage of the tax rules for your small business.

Self assessment payments on account

The balancing tax payment for 2007/08 will be due for the self employed/partners at the end of January 2009.

At the same time the first payment on account will be due for the current year 2008/09. This first payment is exactly one half of the final 2007/08 tax and Class 4 NIC bill.

If profits have remained fairly stable then these payments will be broadly correct and indeed known well in advance of payment becoming due.

However, if profits are falling it is possible to claim to reduce the payment on account to be more in line with the expected tax liability.

An example will help.

Let's assume the business has a 30 April accounting date, profits have been stable for many years, and usually there is an annual tax bill of 20,000.

With tax due at end of January 2009, the balance for 2007/08 would be negligible, while 10,000 will be payable on account for 2008/09.

However, the business accounts for the year to 30 April 2008 (assessable in 2008/09) show a sharp decrease in profits and the expected tax liability for the whole year will be only around 5,000 in total.

Therefore the payment on account due 31 January 2009 could be reduced to 2,500 (half of the expected liability) with a second payment on account of 2,500 becoming due on 31 July 2009.

It should be noted that if the payments have been reduced excessively there will be interest to pay and HM Revenue & Customs (HMRC)may charge penalties if they think you have overdone it on purpose.

Bad debts and losses

Where it can be demonstrated that a debt has become irrecoverable, a deduction can be claimed in the business accounts so that tax relief is given against that bad debt.

There are a number of ways that the tax rules can help to ease the burden for small businesses

However, such adjustments must be specific and not general provisions in respect of "slow payers".

Where a small businessman makes a loss, if he is operating as a sole trader or partnership, he can claim tax relief for that loss.

This can be done either by setting the loss against other income of the same year, or by carrying the loss back to set against income of the last year - both should result in a tax repayment.

Alternatively, the loss must be carried forward to set against a future profit.

There are special rules that apply in the first four years of trading, in that any loss incurred may be carried back up to three years.

Again an example shows how this works.

Ben was employed and had the following earnings

  • 2004/05. Pay 20,000, tax paid 3,114
  • 2005/06. Pay 25,000, tax paid 4,172
  • 2006/07. Pay 30,000, tax paid 5,234

He starts in business on 6 April 2007 and his accounts for the year to 5 April 2008 give a tax loss of 15,000.

He makes a claim to set this loss against his earnings for 2004/05 resulting in a tax repayment of 3,089 to which the Revenue will add some interest.

VAT cash accounting

Cash accounting means that a businessman can pay VAT over on the basis of payments received and made, instead of by reference to when the tax invoices are issued and received.

This means that the VAT payable for each accounting period will be the difference in the VAT on monies received from customers and the VAT on payments made to suppliers.

The longer the time lag between issuing invoices and receiving payment from customers, the more beneficial this cash accounting scheme will be.

Another advantage is that it simplifies the book keeping requirements of the business and gets around the delay in claiming VAT bad debt relief where a customer fails to pay - normally a six month waiting period is required before a claim can be made.

As would be expected there are a number of rules to follow.

It is only available to businesses with an expected taxable turnover not exceeding 1.35 million in the next 12 months, but the scheme may be of help with cash flow problems for some businesses.

Overall, there are a number of ways that the tax rules can help to ease the burden for small businesses in these testing times.

The most important thing to remember is that the business owner should not bury his head in the sand but rather talk about any problems with his adviser who will be able to offer help including the options given above.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.

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