Posted: Mon 18th Feb 2019
Ever wondered why you can't seem to claim the same tax reliefs as large companies? How come your company has to pay so much tax, but others don't? Paula Tomlinson, ICAEW accountant, Enterprise Nation adviser member and founder of On The Spot Tax, offers advice on the tax reliefs small businesses can benefit from.
A company's tax rate is the same rate, currently 19%, regardless of size. So this doesn't explain any apparent disparity.
The explanation revolves around what can be deducted against sales to reduce the profit on which the 19% tax rate is paid. These can be called tax deductions.
So what tax deductions are large companies claiming?
Shares and share options for employees and directors
Many companies give shares to staff or sell them at a lower price than the true value. They are a great incentive helping businesses become more successful. Large companies are geared up for this, but small companies are not, and they are not very well understood.
Tax deductions are specifically made available to all companies for the profit employees make on their shares. This revolves around the idea that these are part of being an employee with the employee paying income tax and national insurance on this same profit. Therefore, the company enjoys a tax deduction for the amount by which the employee benefits.
For larger, high profile, companies such as Amazon and Facebook, these shares may be in the US top company. As the US stock market rises, the profit which UK employees benefit from has increased, and therefore the tax deduction the UK company claims, has increased.
Growing businesses can benefit from exactly the same deduction and incentivise their staff with shares, however, the value of your company's shares may be difficult to determine, costly to prepare and unreliable.
But, importantly, you also have access to a very tax efficient share option scheme, not available to large companies, to help encourage you to take part, despite these difficulties. It has to be worth a look.
Research and development
Large companies, again, are well advised in this area and due to large investment, they receive a lot of tax relief.
Growing businesses tend to benefit from research and development when developing software. There are certain criteria to fulfil, such as new, untested algorithms must be written, which often does apply.
If you have set up more than one company for historical or commercial reasons, make sure you're set up in the best way for legitimate tax planning. Two or more companies owned directly by the same person/s are unlikely to be a group for tax purposes.
Large corporates are set up as groups with a top, holding, company. This means that if one EU subsidiary company doesn't do as well as expected, its losses can be offset against another EU profit-making subsidiary. You could do this too!
Loans not equity
Interest paid on loans is a tax deduction, whereas dividends paid on shares are not. Large companies are good at moving cash around the group lending it to high tax rate countries so they benefit from a tax deduction for the interest paid.
As a growing business, you can use different, but still useful, rules by borrowing from a bank, or from your own savings. You can charge your company interest which may either not be taxable on you at all, or you may enjoy a personal tax deduction for interest you pay on a personal loan.
Yes, there are other areas that UK start-ups can't benefit from such as a registering a truly global brand in a low-tax country but there are still many opportunities available to small companies, so make sure you know about them all.
Remember to only act or refrain from acting on the above when you've taken advice based on your particular situation.