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Tax breaks that businesses overlook

Tax breaks that businesses overlook

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Tax is often a subject that small businesses only think about when they have to pay it. But research shows that if business owners paid more attention to tax relief they could actually save themselves significant amounts of money.

Richard Farnsworth, tax director at accountants PricewaterhouseCoopers, says ignorance of tax breaks can be a vicious circle. Small businesses are often reluctant to employ an accountant because they're short of money. So they miss the chance to ask about ways to cut their tax bill.

"If you're a small business it tends to be you and your spouse or a few mates. Most are spending 24 hours a day running around trying to find the next customer and often haven't got an in-house accountant, let alone the means to pay an external one."

But he says the Chancellor is keen to help small businesses - if they know where to ask for help. The Government wants to encourage spending, for example, on research and development (R&D) and by early 2006 about 22,000 claims had been made for tax credits for R&D.

Just over 19,000 came from Small and Medium Enterprises (SME) and just under 3,000 from larger companies, a total of "1.8 billion worth of claims.

Missed opportunities

Farnsworth says the following areas are often overlooked by small businesses:

• Research and Development: R&D tax credits can either cut a company's tax bill or, for some small or medium sized companies, provide a cash sum. SMEs may be able to claim payable tax credits in cash from HM Revenue & Customs if they have losses in the accounting period. The payable tax credit could amount to £24 for every £100 of actual R&D expenditure.

• Enhanced Capital Allowances: Businesses can, for example, claim 100 per cent first year allowances on investment in certain energy-saving plant and machinery.

• Enterprise Investment Scheme: This offers relief for investors in small businesses and is under-used.

• Enterprise Management Incentive (EMI) scheme (a share scheme designed for smaller businesses): An annual survey by PricewaterhouseCoopers showed take-up is improving (from three to 12 per cent) but is still not as widely used as it could be.

Keeping up to date

The ideal way to make sure you're not missing out on any breaks is to employ an accountant or financial advisor. The Federation of Small Businesses recommends arranging regular meetings to make sure that you are up to date with the latest developments in tax relief.

The best advisors should earn their fees by spotting areas where you're not claiming tax breaks.

But if you don't have the extra cash to spend on an outside advisor you can increase your own knowledge by gathering information yourself:

• Government bodies: The Inland Revenue and Department and Trade Industry are both helpful and free. Tell the Inland Revenue what you do and what tax you're paying and they should be able to point out the tax breaks you're entitled to.

• Chambers of Commerce and trade bodies: These are both useful places to check that you're not overlooking a vital tax perk.

Biting the bullet

If you're struggling to keep a small business going taking time out to check your tax position can seem like a luxury but Farnsworth says it will pay dividends in the long-run.

"I know it's hard to do, but put a couple of hours aside once a month to sit back and think. Look at the bigger picture. It's a very easy way to make money - to take advantage of the tax breaks that are there. The government is trying to give them away but it's just that they wrap them in red tape."

"Some of the new industries - computer and IT - are quite savvy in terms of tax planning. It's the more traditional type, manufacturing businesses, who don't necessarily know what breaks there are for them."

Sometimes you have to fight for your rights - but that too costs money. Arctic Systems, an IT company run by a husband and wife team, proved this point when they won their four-year battle against HM Revenue & Customs this summer. The Revenue failed in their bid to make the couple pay a £7,000 tax bill and were also told to foot their legal fees after the case.

But Farnsworth says the couple are a rare example of a small business prepared to give up the time to cut through the red tape to claim what is theirs.

"There are so many different hoops you've got to jump through to claim the relief."

HM Revenue & Customs:
http://www.hmrc.gov.uk/businesses/index.shtml
British Chambers of Commerce:
http://www.chamberonline.co.uk
Federation of Small Businesses:
http://www.fsb.org.uk PricewaterhouseCoopers: http://www.pwc.com

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