In wintry economic conditions, Dawn Elliott, tax partner with KPMG’s middle market practice, explains how carefully tending your tax plans can help feed growth until the spring

T he most successful companies in the UK are those that respond to the challenge of achieving continual core growth. In an uncertain economy, smaller businesses will be focusing on their strategy for organic growth, often giving them greater scope than they previously realised.

Well-structured tax planning cannot only help release valuable cash back into a business looking to grow, but once growth has been achieved, the need for more sophisticated tax planning strategies will also come into play, adding value to meet your needs is a key factor in setting a tax strategy to maximise value for the long term. Your strategy needs to take account of your current and expected future activities and be flexible enough to meet challenges that arise as your business develops and tax rules change. In this way, your business structure can be varied to maintain and add further value to a growth strategy and meeting a company’s changing needs.

Therefore, it is important to keep your tax plans under review as economic conditions and your business changes, in order to maximise your tax position. For example, if your strategy has given your business a new direction, selling off non-core interests can potentially be tax-free under the substantial shareholdings exemption, if the transaction is structured in the correct way.

Since tax remains one of the largest costs faced in generating wealth, considering the structuring options that may best meet your needs is a key factor in setting a tax strategy to maximise value for the long term. Your strategy needs to take account of your current and expected future activities and be flexible enough to meet challenges that arise as your business develops and tax rules change. In this way, your business structure can be varied to maintain and add further value.

Raise pay to cut costs

Employment costs are one of the largest costs of running a business and there are many ways that employers can make a significant reduction to this expense without reducing employees’ net take-home pay. It is also worth noting that many of the ideas are viewed as unaggressive by HM Revenue & Customs (HMRC). In fact, with careful planning, employers can actually increase their workforce’s salary and benefits package, while reducing the company’s overall remuneration bill.

The key is to examine the benefits currently being provided to employees and whether they can be delivered in a more efficient way for tax or National Insurance (NI) purposes. It is often most cost effective to provide benefits through salary sacrifice, especially if the reward itself attracts no tax or NI. In addition to receiving a valuable benefit, employees generally save both tax and NI on the reduction in their gross salary (for a basic-rate taxpayer, this would amount to a 33% saving) and businesses save employer’s NI contributions at 12.8% on the same amount.

In addition, those benefits that do attract a tax or NI charge, such as company cars, can also be provided in a more cost-effective manner through salary sacrifice, and VAT savings can also be achieved. It is important to remember, however, that employers must generally seek agreement to the reduction in gross salary, as it constitutes a change to an employee’s terms and conditions.

Improve VAT cashflow

VAT can have very large cashflow impacts on a business – but this can be a positive thing if the administration is managed correctly. The most important element of any VAT planning is to make sure that tax charged on costs incurred by the organisation is capable of being offset and recovered from HMRC. Once achieved, it is important to make sure that the VAT on sales is paid at the latest possible opportunity and that VAT on supplies to the business is recovered as soon as possible. There are a number of straightforward opportunities around timing which can significantly improve VAT cashflow.

Also, a landmark decision by the House of Lords this year, could benefit your business. The ruling stated that the government’s introduction of the three-year time limit for VAT reclaiming in 1997 was unlawful as, under European law, it failed to provide taxpayers with a fair transitional period, thereby preventing them from bringing claims which the previous law would have allowed them to make. HMRC is now in a position where it has to provide a transitional period allowing businesses to make such claims.

As there appears to be scope to make claims now, even for VAT that could not have been claimed in 1996/7, companies should consider whether they have claims to make, top up or reopen for pre-May 1, 1997 input tax and pre-December 4, 1996 output tax. I believe this is a one-off opportunity that every company should consider. For a medium-sized business even VAT on mileage claims or petty cash over that long a period could be a handy sum.

Get relief on taxes 

The objective when planning for corporation tax is, as far as possible, to make sure that expenditure incurred is tax deductible and that income generated is tax free. The latter is extremely difficult to achieve unless you are looking at the area of capital profits, but the issue of deductibility of expenditure is key.

Excellent systems within a business cannot only aid these deductions, but also enable you to identify expenditure that qualifies for additional tax relief, such as research and development allowances. Another area where identification of expenditure is critical is that of fixed assets.

The rate of allowance can vary from zero to 100% making identification of expenditure critical. However, as well as looking at current expenditure, there is scope to go back over that which has taken place in prior years and make additional claims.

Finally, where the business has a foreign dimension, it is important that interest expense is deductible in the jurisdiction where the tax relief is maximised. Again, there are a number of interesting ideas to maximise tax deductions for interest paid on business borrowings.

Starting and growing a business is never easy, and struggling with the immediacy of cashflow and survival issues are just some of the challenges. However, a review of the array of taxes that businesses contend with will help to highlight the impact it has upon a business. It’s not just corporation tax that needs to be taken into account – there’s also stamp duty, capital gains tax, National Insurance, PAYE and business rates to be aware of, all of which affect businesses at various stages of their lifecycle. And it’s not only a one-way flow of cash out – forward thinking businesses should also be aware of the tax reliefs on offer too.