Study tips: Business tax

In this article we will focus on the role of the tax agent, advising the sole trader on how to minimise the tax due to HMRC, when to declare the liability and when to pay it.

Agent’s responsibilities

An agent’s main responsibility is to work in the best interests of the client. As part of that duty of care the agent is to encourage tax planning and the efficient use of allowances, and in so doing minimise the client’s tax liability. This is mainly done by the efficient use of different tax reliefs.

The main tax reliefs available to the sole trader are as follows:

  • Capital Allowances
  • Personal Allowances
  • Personal pension contributions and Share Investment Plans (SIP)
  • Charitable giving

Capital Allowances

The two most useful capital Allowances are the Annual Investment Allowance (AIA) and the First Year Allowance (FYA).

AIA

This is a 100% allowance for the first £200,000 of plant and machinery costs.  It is available to all businesses and means that office furniture and equipment, computer equipment and other necessary equipment can all be claimed under this very generous allowance. The only exclusion is cars. However, there is a way of claiming for those too.

FYA

The 100% FYA is available for new low emission cars (75g/km or less). This is never time-apportioned so the whole amount can be claimed in an accounting period.

So, when advising client’s it is always worthwhile pointing out these allowances, encouraging the careful tax planning of an organisation’s resources while supporting the environment with less polluting vehicles.

Individual tax planning

For the sole trader the burden of tax can be high, so they are often keen to reduce the amount by whatever legitimate means they can. Below are some of the more useful ways of reducing the tax liability, whether it is now, or in the future.

Personal Allowance

These simple allowances can be overlooked when tax planning. Every individual has an annual Personal Allowance (PA) as indicated in their tax code (standard tax code for 2017-18 is 1150L), so when writing of any losses it is incumbent on the agent to consider whether or not the Personal Allowance is to be used or protected.

Marriage Allowance

Another allowance that is often forgotten is the Marriage Allowance.

This allows the transfer of £1,150 of a spouse or civil partner’s PA to the husband, wife or civil partner. This will reduce the tax bill of the recipient by £230. To do this, the giver must have an income of £11,500 or less and the recipient be a basic rate tax payer (earning no more than £45,000 in the tax year 2017-18).

This may be a small amount, but it could stop the client moving from the basic rate band of tax (20%) to the higher rate band (40%). A useful piece of tax relief.

Pension contributions and Share Incentive Plans

The population is getting older. Many sole traders are now looking towards their retirement. They are now looking towards their retirement and are thinking more about their pension plans.

Pension contributions

Pensions are a tax efficient means to reduce the tax liability for the client, while at the same time ensuring that the client can retire with some degree of comfort. It is one of the first things on an agent’s agenda when taking on a new client as the earlier the client starts to save, the bigger the pot of money when they finally give up work. A client can put in up to £40,000 per annum into a pension up to a lifetime limit of £1,000,000.

For individuals earning over £150,000 there is a restriction to the amount of tax relief available in the form of tapering of the annual allowance.  For every £2 of income above £150,000 per annum, £1 of annual allowance will be lost. The result of this restriction means that for earnings over £210,000 only tax relief on the first £10,000 of pension contributions can be claimed, making investment into a pension less desirable. However, there is another financial instrument that can be used.

Share Incentive Plan

A Share Incentive Plan (SIP) is another way of reducing the tax liability while benefitting the client. It does not have the same restriction of tax relief on contributions as pension contributions, and this is available to all.

A company can give up to £3,600 free shares to employees, while partnership shares are restricted to either £1,800 or 10% of income for the tax year. This is of benefit to an additional rate tax payer as they can buy shares in their organisation without having the tax relief restriction that comes with pension contributions. An agent should consider this option when advising their additional rate tax payer clients.

An employee can pay into a SIP as well as a pension. They are not mutually exclusive. seen how some of these tax reliefs can be used to reduce the client’s tax bill.

Summary

So, just by taking one example it can be seen how some of these tax reliefs can be used to reduce the client’s tax bill.

With only the PA to reduce the amount of tax paid, the total tax liability would stand at £22,700. What action would the agent advise in order to reduce it?

Using just some of the tax reliefs available to the individual we can reduce it to £6,700 as follows:

 

£33,500 x 20% = £6,700, reducing the tax liability by £16,000. Of course, this makes the assumption that investing a large sum of money in a long term investment will not be detrimental to the client’s lifestyle. But if the client can afford to do this, they should be encouraged.

Finally

For those kind-hearted clients a further way to reduce the tax liability is to donate money to a registered charity. Many clients are willing to give 80% to a good cause rather than 20% to the government coffers. It will increase the basic rate band by the gross amount, and as with all the above reliefs and allowances ensure that the tax due is legitimately minimised. Exactly what an agent must do.

Thinking of (legitimate) ways of reducing the amount of money paid to HMRC is a wonderful challenge. Think of a figure, think of the allowances and deductions to use and calculate the amount of tax saved. It is a great way to while away the time sitting on trains and buses, in traffic jams and in doctor’s surgeries. It also prepares you for the role of the super-efficient tax agent.

Julie Hodgskin is a fellow member of AAT, runs a licensed accounting practice and is a technical materials author for CIPP.

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