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TAX BREAKS FOR UNINCORPORATED BUSINESS - GETTING STARTED

Whether you’ve just started your business, have an established trade or are winding down to retirement, the tax system includes special rules for sole traders and partnerships. As a business owner, understanding these is vital to avoid falling foul of HMRC and making the most of the tax breaks available. 

Content

What’s an unincorporated business?
What should be considered before trade starts?
What should be considered when trade commences?
What can be claimed when the business is running?
What can I claim for business travel?
What can I claim in respect of computer equipment and my website?

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What’s an unincorporated business?

Put simply, an unincorporated business is any business that is operating through any vehicle other than a limited company, e.g. a sole trade or partnership. Ensuring your new business is as tax efficient as possible is a crucial factor in determining its success or failure. Fortunately, there are a number of legitimate tax breaks you can use to your advantage through each stage of the business life cycle.

What should be considered before trade starts?

You should be thinking about your deductible expenses before you even take the plunge and start trading. Many businesses take years to set up properly for one reason or another, and often the owner will be incurring expenses in preparation for launching. Think of a photographer – they will need equipment, software, know-how and probably a portfolio to attract business before they can start charging for their time.

Top tax breaks

• It is possible to deduct such pre-trading expenses going back seven years against your taxable income in your first period of trading if you can show they would have qualified for a deduction if they were incurred on your first day of trading.
• You can even potentially claim for items that you didn’t initially intend to use in your business.
• If you register for VAT, you can claim input tax for goods and services purchased prior to registration if these have not been “fully consumed” at the registration.

What should be considered when trade commences?

Once you’ve actually started selling your goods or services it’s easy to get caught up in the excitement of your new venture. However, it’s crucial not to overlook the requirements that you have in respect of notifying HMRC, otherwise you’re at risk of penalties.

Top tax breaks

• You need to tell HMRC that you have a liability to income tax no later than 5 October following the end of the tax year it arises in.
• You may need to notify earlier if you exceed the Class 2 or Class 4 NI thresholds, even if there is no tax liability.
• You will be given a unique taxpayer reference and will need to complete tax returns with details of all of your income each year.
• There is a small profits threshold for Class 2 NI.

What can be claimed when the business is running?

One of the first decisions to make is what date you will make up your accounts to. Most sole traders simply align this with the tax year, and this does keep things simple. If you choose a different accounting date, the special basis period rules determine what profits are taxable in the early years, and this can mean initially paying tax twice on the same income. This does sort itself out later on, but unless you have a pressing reason to do otherwise, we suggest using the tax year to minimise cashflow disruption.

Top tax breaks

• Cash accounting can be used by businesses with turnover below £150,000, saving you the need to learn complicated accountancy rules.
• The basis period rules determine how your early years’ profits are taxed.
• Losses can be offset against general income which can help with cashflow, e.g. if you also have taxed employment income a loss could mean a rebate.
• There are enhanced rules for relieving losses in the first four tax years of trade.
• Unused losses carry forward to offset future trading profits of the same business.

Once you’re up and running, a key skill to acquire is to have an awareness of what expenditure you are allowed to deduct from your income to work out your taxable profit (or allowable loss). This can be more complicated than just keeping receipts, as there are a number of simplified deductions and flat rate adjustments available, e.g. for business mileage. You will need to develop a sense of judgement as to when using these will be more favourable for you to use.

Top tax breaks

• You can claim a fixed deduction, approved by HMRC, if you work at home. Alternatively, you can apportion some of your overhead expenses in a fair and reasonable way instead.
• It’s possible to use family members to help in your business and pay them a wage for doing so, as long as this is at a justifiable level for the work they do.
• Capital allowances are available to secure tax deductions for equipment you purchase for the business.



What can I claim for business travel?

If your work involves travel for business purposes, then you are going to need to understand the difference between “business travel” and “ordinary commuting” for tax purposes. You can claim expenses for the former but not the latter, so if you have an office you don’t claim petrol costs for travel between that and your home. But you can claim for travel from your home/office to see a customer. There are lots of ifs and buts when it comes to the business travel rules, so get to grips with them ahead of time.

Top tax breaks

• You can claim a deduction for an appropriate proportion of your fuel and running costs if you use your own vehicle for business travel.
• Capital allowances are available for cars, and vans can be even more tax efficient.
• VAT can be reclaimed on purchases or leases of cars used exclusively in a business, but not if there is any private use.
• VAT can be reclaimed on van purchases even if there is private use.

What can I claim in respect of computer equipment and my website?

The good news is that most of the costs associated with IT equipment and setting up/maintaining a website should be tax deductible.

Top tax breaks

• You can claim the cost of hardware such as computers, printers, etc. under the capital allowances regime. Thanks to the generous annual investment allowance (AIA), it’s likely that a fledgling business will get a 100% deduction in the year of purchase. This is also true for longer-term software contracts.
• Short term software purchases, for example licences for twelve months, can be treated as normal revenue expenditure and deducted directly from trading income. This will be useful if you have already used up the AIA.
• The initial costs of setting up a website are likely to be a capital cost, and so fall under the capital allowances rules. However, the ongoing maintenance expenses will be revenue in nature and can be deducted directly.


   TAX BREAKS FOR UNINCORPORATED BUSINESS - GETTING STARTED