How to avoid a summer tax scorcher

SMEs are responsible for contributing 47% of all private sector turnover in the UK and now account for 99% of the businesses in every main industry sector. Self-employed workers are equally vital to the future success of the economy and now comprise approximately 5 million of the UK workforce, a 45% rise since 2001-02.

Biting the hands of those feeding the UK economy?

Fledgling entrepreneurs are willing to take personal risks to establish tomorrow’s fast-growing startups and thriving businesses, but many are bracing themselves for a significant rise on their tax bills.

Attempts to increase the national insurance contributions (NICs) paid by the self-employed and small business owners, first announced in the Government’s 2017 budget, have since been rescinded. Similarly, plans to cut the tax-free dividend allowance for company shareholders from £5,000 to £2,000 in April 2018 have also been shelved. However, it remains to be seen if these policies will be resurrected.

June’s snap general election, along with the pledges made by the main political parties, did little to lift the mood amongst small business owners. This was emphasised by Labour’s intention to hike corporation tax up to 26% compared to the Conservatives’ proposed reduction to 17%.

Self-employed v limited company – tax pros and cons

Reductions in the corporation tax rate – from 28% in 2010 to 19% from April 2017 – have seen more SMEs set up as a private limited company or limited liability partnership for tax efficiency purposes. This offers greater flexibility for firms to preserve money for investments and distribute profits among shareholders and directors. Married SME owners can also make the most of each personal allowance (£11,500 for 2017-18) to shift income-producing assets to a spouse who is taxed at a lower rate.

In contrast, generally more costs are involved when setting up a limited company, in addition to complex accounting and administrative requirements which can be time-consuming. Limited companies also face closer scrutiny from Government officials, underlined by HMRC collecting an additional £3.3 billion from SMEs following enquiries into underpaid VAT over the past year.

Self-employed workers have full control over their business, fewer initial setup and ongoing costs, and they do not need to notify Companies House. However, sole traders have less financial security and are responsible for paying tax and national insurance contributions. The 31 January and 31 July self-assessment online tax payment deadlines are particularly stressful times for self-employed workers. Many put off budgetary planning and struggle to find the cash to pay their liabilities on time and are subject to fines.

Take the heat off your tax liabilities

Complicated tax legislation, uncertainty surrounding Brexit and the longstanding issue of late payments, make it exceedingly challenging for businesses to plan for their long-term growth and sustainability. Overdue invoices can cause significant financial heartache, as the VAT must be paid irrespective of whether payment has been received. According to research by Zurich UK, SMEs are currently owed more than £44.5 billion in late payments, leaving many firms without the necessary cash flow reserves needed to cover their tax liabilities.

Specialist alternative finance providers, such as Wesleyan Bank, provide bespoke funding to enable SMEs and self-employed workers to boost their cash flow by spreading the cost of their VAT bills (over three to 12 months) and tax liabilities (over six or 12 months). Flexible external finance solutions are being adopted by an increasing number of small businesses who wish to gain greater predictability over their expenditure and smoothly manage peaks and troughs, without compromising their existing banking lines.

Paying tax and VAT liabilities over time can be highly beneficial. This ensures vital cash reserves can be utilised in other important areas of a business, such as supporting investment in new equipment and modern technology, assisting SMEs to improve productivity and compete with larger, more established firms.

The economic landscape is evolving so the UK’s small businesses must consider carefully which operating structure is right for them. While some political decisions may be beyond their control, they can take some comfort in the fact that external finance can provide short-term and long-term funding solutions to support them at every stage of their business’s life cycle.

If you’d like to get an instant quote online to spread the cost of your upcoming tax liability, visit our customer portal.