One of the first things entrepreneurs get advised is to make their business tax efficient.
It is a minefield for businesses and hiring a good tax adviser or accountant is paramount but here are some tips that help in ensuring that your business is tax efficient.
1. Difference between tax avoidance and tax evasion – tax evasion is illegal and will land you in trouble whereas tax avoidance is widely practised. However, be careful of methods and schemes that look legal but are not accepted by the tax authorities. Always ask the question from any adviser or accountant touting such schemes but my advice is to avoid such schemes. Better to have a business and pay tax rather than have some cash now and bankrupt your business later. Some legitimate tax planning maybe suitable but not any tax savings schemes that sound too good to be true.
2. Get a good tax adviser and avoid fancy tax saving schemes – accountants and lawyers can recommend reliable and honest tax advisers. If they start touting fancy schemes, avoid them. You can listen to tax advisers but it is your business and you must measure the risk of following any advice or tax saving schemes. The key question to ask is if the tax authorities have accepted such schemes.
3. Pay your taxes on time – VAT and PAYE have to be paid monthly or quarterly and corporation tax annually. Make sure that you manage your cash flows to do this. Unpaid taxes ring alarm bells and many small businesses get caught out by using taxes as working capital. Once caught, tax payment arrangements will be put into place and gives you far less freedom.
4. Have your paperwork – tax authorities do need to validate that expenses and anything claimed against the profits of the business do have legitimate documentation. Ensure your housekeeping is tip-top. Scanning your documentation is best. Be ready for an inspection whether for VAT or tax. It may never happen but act as if it would.
5. Get a good accountant – most accountants will prepare tax returns and advise on tax matters but as the business grows, getting a tax expert will pay off. Accountants can also sell you insurance to meet the costs of a tax investigation (usually the cost of the tax adviser or accountant liaising with the tax authorities). However, my view is that if you follow the above tips, you may not need this except for peace of mind in covering such costs.
6. Save your taxes into a separate bank account – whether its VAT or PAYE, it makes sense to make the calculations and deposit monthly amounts into a separate bank account that you don’t touch except to pay the taxes when due. When a business is small and growing, it can be difficult to differentiate between the taxes due and normal working capital. Once the business is of a certain size, you can employ a part-time accountant or FD to look after such things.
Always remember that the tax tail should not wag the business dog.