Efficiency is critical to business success irrespective of market sector or profession. And with profit being a function of revenue less cost, minimising tax whilst staying on the right side of HMRC is essential. Of course, it should be remembered that tax is a quagmire ready to swallow up all who become entangled with it. Good advice should be sought. The business structure A business could operate as a sole practitioner with one individual, employing staff as the business grows; a partnership with two or more partners in business together, sharing profits or losses; a limited company which is a separate legal entity with the owner commonly taking the combined position of directors and shareholders; or a limited liability partnership which is a hybrid between a partnership and a limited company, taxed broadly as a partnership. Each structure has pros and cons when it comes to tax, administration, liability and wider business considerations, but the choice isn’t necessarily a one-off decision. Businesses typically follow a lifecycle from start-up through to eventual sale or closure during which the most taxefficient structure may change. Professional advice on business structure should be taken a few years in advance of major events such as expansion, sale or retirement to make sure the tax position is optimised. A suitably qualified accountant or tax adviser can assess the business along with the personal tax position of its owner. By looking at the complete picture, including senior stakeholders’ personal and family circumstances, tax efficiencies can normally be found, and plans put in place for longer term objectives. Remuneration planning As a business grows, incorporation may be tax-efficient in order to benefit from lower rates of corporation tax compared with income tax. The downside is that this introduces a second layer of taxation – corporation tax is due by the company and then personal taxes are payable on extracting profits to the owner. However, a company structure allows control over how much of the business income the owner is taxable on, allowing them to maximise use of their lower rate tax bands each year. This can be especially valuable in the event of business profits fluctuating as it allows profits to be kept within the company in good years to reduce the owner’s exposure to the top rates of income tax. By comparison, a sole trader would be liable to tax on a bumper year’s profits in full. Equally, if the company has lean years the owner may still be able to extract company reserves as salary or dividend to make use of their personal tax allowances and basic rate tax band. The remuneration package of owners who are also directors and shareholders of incorporated practices can be tailored for tax efficiency, balancing their personal tax position with the cost to the company. Unlike dividends, salaries are an allowable expense when calculating a company’s taxable profits, so it may appear sensible to remunerate the owner with just salary. However, National Insurance Contributions 12 AFTERMARKET MAY 2024 BUSINESS www.aftermarketonline.net MAKING SURE THE BUSINESS IS TAX EFFICIENT No business wants to pay more tax than is required, which is truer than ever in today’s economy By David Wright, Technical Officer, Association of Taxation Technicians
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