Recent reports have put HMRC in the spotlight, revealing frustrating delays that mean some business owners are waiting more than four months to receive a refund on their overpaid tax.
For many small businesses, this isn’t just an inconvenience. It can create serious cashflow problems, which can strain day-to-day operations and hinder growth.
The smartest way to avoid delays – and more importantly, to keep your hard-earned money working for you – is to ensure you’re not overpaying tax in the first place.
Here, Tom Biggs breaks down three key strategies that will help you avoid this situation in your business.
1. Keep accurate records
One of the biggest pitfalls small business owners fall into is getting swept up in the day-to-day and neglecting their bookkeeping.
Given the UK’s tax code is one of the most complicated in the world, making overpayments is an easy mistake to make, but this can be minimised by maintaining organised and accurate financial records. Without doing so, it’s impossible to correctly calculate tax liabilities and substantiate any deductions or credits claimed.
It can also result in fines from HMRC if tax returns are submitted with errors, which causes the opposite problem of needing a refund.
Ensuring you comply with tax regulations and deadlines is also essential to avoid interest charges and penalties for late filing or underpayment. Implementing robust accounting processes will help you keep accurate records, which will make the tax return process significantly easier and mean you avoid overpaying tax.
2. Plan strategically (and proactively)
Leaving your tax return to the last minute means you don’t have time to plan effectively and can lead to overpayment of tax due to incorrect calculations. Proactive tax planning throughout the year means you have a clearer headspace to keep accurate records, and you have more time to identify tax-saving opportunities.
This might involve changing the timing of income and expenses, finding the optimal legal structure for the business, or making the most of tax-advantaged retirement plans. For instance, Corporation Tax is charged on a sliding scale depending on a business’ taxable profit. So, by strategically planning, you could reduce the business’ taxable profit to decrease the amount of Corporation Tax owed.
A qualified tax advisor can help you develop and implement a tax strategy tailored to your business’ specific circumstances.
3. Maximise your allowable deductions and credits
Tax deductions reduce a business’ tax liability by deducting certain expenses from its profit. These expenses are generally things that make it possible to sustain the business, such as operational costs like rent and utilities, investments in equipment and research, or PR and marketing costs. In practice, this means that if a business has a taxable profit of £100,000 but has £20,000 worth of allowable expenses, the actual taxable profit would be £80,000.
There are also tax credits to consider. These work differently from deductions as they directly reduce the amount of tax owed, rather than the pre-tax profit. There are several types of tax credits available for different industries, including R&D tax credits and the Annual Investment Allowance (AIA). These act as incentives for businesses to invest in certain areas to qualify for a discount on their tax bill. But be warned, they are constantly changing and have complicated qualifying criteria, so it’s crucial to consult a tax expert before beginning any claims.
Final thoughts
Navigating the complexities of the UK tax system as a small business owner can feel like a minefield, but overpaying on tax doesn’t have to be inevitable.
By prioritising record-keeping, embracing proactive and strategic tax planning throughout the year, and exploring available deductions and credits, businesses can significantly reduce their tax liabilities and their likelihood of overpaying tax.
Not only will this avoid frustration with lengthy refund waits, but it could reduce your overall tax liability from the outset to contribute to the overall financial health and stability of your business.
Find out how Wellers can assist with your strategic tax planning.
Ercan Demiralay is partner at the small business accountancy firm, Wellers.
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