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Tax incentives that small businesses need to know about

Every business owner knows just how exciting starting a business or scaling up can be, but that’s not to say it doesn’t come with its own challenges. Increasing ROI and tax-efficiency are usually at the top of every small business owner’s agenda, and putting procedures in place so that you can enhance cash-flow through becoming tax-efficient doesn’t have to be hard. London based accountancy firm, 3 Wise Bears have put together five tax reliefs and tax incentives that every small business should know about, and how they can apply for them.

Tax incentives for small businesses

1. Register for Value Added Tax (VAT)

Any business exceeding the ‘taxable supplies’ threshold of £85,000 in a 12 month period must register for VAT – if not, they’re at risk of a hefty fine. However, your business doesn’t have to exceed this threshold and can volunteer to sign up for VAT at any time. The VAT threshold applies to turnover instead of profit, and pertains any product or service that is liable for VAT at any rate (even if it is 0%).

After you’ve registered for VAT, you must charge VAT on your products, goods and services. This then enables you to reclaim any VAT you pay on products and services through the business. This is even more beneficial if your customers are businesses rather than individuals – once you have registered for VAT, you will pay less tax.

The benefits of signing up for VAT

  • Registering for VAT means that your business can claim back on the output tax that has been charged to any taxable goods and services purchased through the business.
  • You can re-claim on any input tax you’ve been charged by other businesses.
  • VAT claims can be backdated up to four years – this means you’ll have a lump sum payment, which is great for investing elsewhere in the business.
  • VAT registration numbers help alleviate your reputation within the industry.
  • The Government’s Cash Accounting Scheme means that you can account for both payments you have made or received, rather than invoicing issues. For businesses that regularly deal with late payers or need periods of credit, this allows flexibility.

How to register for VAT

You can register your business for VAT on www.gov.co.uk/vat-registration.

2. Tax Deducted from magazine subscriptions, professional journals and business books

If your business has purchased any magazines, journals or books that are relevant to your trading activities then the cost is usually tax deductible. This small tax incentive could end up saving you around £80 (based on an SME in London with one weekly magazine subscription and the purchase of 10 business books each year).

3. Register for the EIS

Smaller, higher-risk businesses who have been trading for longer than two years but no longer than seven years should consider registering for the Enterprise Investment Scheme (EIS). This UK tax relief scheme was launched in 1994 and aims to encourage further investments in small unquoted companies who are still qualified to carry on trading in the UK. EIS helps raise finances for your business by offering tax reliefs on new shares in qualifying companies. It’s a tax efficient way for investors to put money into SMEs, and for SMEs to incur funds. Investors have the option to invest up to £1,000,000 in any tax year and receive 30% tax relief.

What does a company need to qualify for EIS?

Small businesses can register for the Enterprise Investment Scheme if they:

  • Have a permanent establishment in the UK
  • Are not trading on a recognised stock exchange and have no plan to do so at the time of the share issue
  • Has no control over any another company (other than qualifying subsidiaries)
  • Does not have more than 50% of its shares owned by another business, and is not controlled by another company.
  • Does not expect to close after completing a project or series of projects

You can find out more information on how to apply for EIS on the GOV.UK website.

What can EIS money be used for?

If your business qualifies to register for EIS, you must use the money for any of the following qualifying business activities:

  • Coal or steel production
  • Farming or market gardening
  • Leasing activities
  • Legal or financial services
  • Property development
  • Running a hotel
  • Running a nursing home
  • Generation of energy, such as electricity and heat
  • Production of gas or other fuel
  • Banking, insurance, debt or financing services
  • Within two years of the investment, you are preparing to carry out a qualifying trade
  • Researching and developing what’s expected to lead to a qualifying trade

4. Apply for ECA

Another welcome tax break for small businesses, Enhanced Capital Allowance scheme was introduced in 2001 by the UK Government. This legislation enables businesses to deduct the entire cost of any products regarded as plant machinery, such as equipment, machinery or vehicles that are included on the Energy Technology List (ETL) against taxable profits.

What can’t businesses claim capital allowance on?

  • Any leased items – you must own the product
  • Buildings, including doors, gates, shutters, mains water and gas systems
  • Land and structures such as bridges, roads, docks
  • Items used only for business entertainment

If your business has a fleet of cars that are low on CO2 emissions, any water saving products and any other products that save energy, then this is a tax advantage your small business should get behind. You can find out more about the ECA legislation on the Government’s website, or through your accountant.

5. Apply for Travel, Subsistence and Incidental Overnight Expenses

Business owners and employees can claim back on any business travel that happens outside a normal commute. This includes journeys to conferences, travel to client meetings and trips to meet suppliers. You can deduct tax from travel expenses before Corporation Tax has been calculated. You can claim back on the following:

  • Uber, planes, ferry, train, tube, coach, bus and taxi fares.
  • Car hire, car parking, road tolls and congestion charges.
  • Subsistence expenses when you’re away from your normal place of work for work reasons.
  • Hotels and overnight subsistence expenses

What is included in Incidental Overnight Expenses?

Small businesses can claim back £5 for incidental overnight expenses if you are staying in the UK, and £10 a night if you are overseas. These expenses include:

  • Dry cleaning/laundry expenses
  • Purchasing newspapers
  • Phoning home

Find out more about ICO expenses on GOV.UK’s website.

More on tax saving tips for small business owners and small business tax.

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