When you work for yourself, maximising your resources is key to continued success and growth. Sole Trader businesses and Limited Companies are taxed differently meaning there are different ways to reduce your tax liability depending on which route you choose.
A limited company is taxed as a separate legal entity from its owners and directors, whereas sole traders (and partners in partnerships) and their business are taxed individually.
Limited companies are subject to Corporation Tax on their annual profits, and directors need to complete an annual self-assessment return to show any income they have drawn down from their company.
Sole Traders and Partners in a partnership also need to complete a self-assessment return each year and pay income tax and National Insurance Contributions on their business profits after deductions for expenses.
Self-Assessment Tax Returns
After you have registered as a self-employed person with HMRC, you will automatically be required to complete your self-assessment online by the 31st January following the end of each tax year. When we talk about dates for tax, often the date is said to be ‘during the tax year’ or ‘following the end of the tax year’. A UK tax year runs from 6 April to the following 5 April. So, if we are talking about this tax year being 2020/2021 it would start on 6 April 2020 and finish on 5 April 2021.
Self-Assessments filed online must be submitted by the 31 January so your self-assessment for 2020/21 would be due by 31 January 2022. HMRC encourage taxpayers to submit their self-assessment online but if you choose to file a paper return you will need to do so by 31st October after the end of the tax year in question. Filing your tax online gives you an extra 3 months to complete your return, however we would encourage you to file ahead of this deadline to ensure you do not run into technical difficulties or incur fines for late submission.
Any tax you owe for that tax year, must be paid in full by the 31st January of the year following deadline.
So what expenses should you be claiming to reduce your overall tax liability?
Claiming for food has always been a tricky subject. Generally, HMRC will not allow you to claim for food as an expense, however for Limited Companies there are certain allowable circumstances.
- Someone may seek out an expert to provide insight into a specialised topic and offer to buy that person lunch while they discuss the relevant issues. The expert is providing something of value, and as their only benefit is the lunch, that lunch can be claimed as a legitimate expense.
- Running a training courses where tea, coffee and lunch is supplied is also an allowable expense. The cost can be claimed because you are under a contractual obligation to provide food.
- Staff entertainment is another expense that is often overlooked. Regardless of the nature of your business you can claim up to £150 a year, per head staff entertainment. This can be claimed even if the company just consists of you as a director, because you are classed as an employee.
These expenses are not available allowable for those who are self employed.
2. Business trips and holidays
You cannot claim for turning a holiday into a business trip.
It doesn’t matter what fantastic opportunity comes your way during the trip. If the purpose of your trip is personal that means you’ve waived the right to claim any expenses.
However there are ways of turning a business trip into a holiday. As long as you’re careful to separate the costs.
For example imagine you have a number of business meetings in Vienna. You fly to Austria on Monday afternoon, allowing you to be rested for your first meeting early Tuesday morning. You have a second meeting later that morning, and another on Wednesday afternoon.
Your return flight is on Thursday morning. The primary purpose of the trip is clearly business — this is important. Make sure you keep proper records, notes and board minutes to document the main reason for the trip.
While your flights and accommodation are allowable expenses, a tour of a vineyard on Tuesday afternoon is not.
You are allowed to do non-business things during your business trip, they are incidental benefits of the main business purpose.
You may wish to invite your spouse to go to Austria with you, which is fine, however you would not be able to claim any of their expenses including their travel costs.
If your spouse has always wanted to see nearby Bratislava, but you don’t have time between meetings to make the journey to the Slovakian capital, you could choose to extend your stay in Vienna by a couple of days, allowing you to book a boat trip down the Danube on Wednesday morning, and return by train in the evening.
Adding personal time to a business trip again is fine as long as you separate the non-business expenses, which will include the additional accommodation and activity costs involved in adding days to your trip.
3. Holiday vouchers for employees
There are however ways to be tax efficient with your employees’ holidays if you run your business through a limited company rather than as a sole trader or partnership. Don’t forget that as a director, you are also an employee.
HMRC allows claims against vouchers given to staff to exchange for holidays. The cost must be reported as a staff benefit, much like medical benefits or a company car.
Here’s how it works:
As a director, your company pays for your holiday, which is reported as a benefit, and it pays Class 1 National Insurance on the cost. You, as an employee pay tax on the benefit, and the company can claim the cost of this benefit against its income, thus reducing the amount of corporation tax it would need to pay.
Additionally, by providing these holiday vouchers the company reduces its salary costs – it would pay higher tax if the cost of the holiday went through payroll. Again these benefits are not available to Self Employed businesses owners who have staff members.
4. Claiming for club memberships
If you operate a Limited Company, leisure activities such as golf club fees and gym memberships can also provide a tax saving benefit. This benefit is not available to those who are self-employed.
5. Business training
Business training can also be an allowable expense. Training can be provided to employees (including directors) is tax free. This training must be work related but does not have to be building on a pre-existing knowledge base. For example, you could choose to undertake an accountancy course, even if you have no knowledge of accounting.
If you are self-employed however the rules are a little different and you need to be careful with training. If you attend a course that will provide you with new expertise, knowledge or skills, you cannot claim this against tax.
However, if you are updating expertise that you already possess, this is a permitted expense. At Think Formations, we can help you to set up your Limited Company, whether you are a UK or non UK resident. We can help you with Banking, Virtual office services and other business functions.