1. Keep a record of your pre-trading expenses
Once you start trading, you can go as far back as seven years and claim tax deductions on the cost of any expenses you’ve incurred in relation to your business – as long as they’re exclusively for the purpose of the business. The types of costs you may incur before you start trading include but are not limited to: research and development, travel, office supplies and insurance.
2. Pick the right legal structure for you
Sole traders are taxed on profits as they are made above the tax free personal allowance. Shareholders, however, only pay tax when they extract funds from the company either as salary or dividends. This means that they can better manage their tax position but the company will pay tax on all of its profits.
Whilst the potential tax implications may have an influence when deciding whether to be a sole trader or a limited company, there are numerous other factors to consider.
In certain situations, setting up as a sole trader is a simpler option as it does not involve the same amount of administration as running a limited company.
However, if you’re anticipating high growth from the off or long term investment and funding will be required then starting out as a limited company may be the way to go.
Do not let your expected net profit before tax and any potential savings be your only driver when making this decision.
3. Time your year-end to suit your business
The date you choose as your year-end will affect when you have to pay tax on your profits. Aligning your year-end with the tax year may be the simplest option but there are many implications for a growing business that you should consider.
For limited companies, an initial accounting date will automatically default to the end of the month 12 months after the date of incorporation. This date will determine when the payment of your corporation tax is due. You should be aware of this date so that you can ensure you have sufficient funds to pay your tax bill when it’s due.
For sole traders and partnerships, careful planning of your year-end date can influence when tax on your profits becomes due. This means that you will have longer to make sure that you have enough cash in the bank to cover your tax bill.
It is also worth considering when you expect to be busiest as finalising your year-end accounts can be time consuming so choosing a date when you’ll be less busy may be advantageous.
When you are planning your tax scenario, it is important to seek the advice of a professional who can talk you through potential tax liabilities and advise you on the best course for yourself and your business. Please do not hesitate to get in touch if you would like some advice on any tax matters.
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