Taxation is a necessary part of any business, but nobody wants to pay more than they have to. However, many SMEs appear to be doing just that, whilst struggling to calculate their tax liability accurately. Research carried out as part of the Office for Tax Simplification (OTS) small business review found that around half of the SMEs consulted were concerned about applying tax rules incorrectly. In addition, around 20% (potentially 700,000 businesses) reported finding it difficult to calculate exactly how much tax they should pay.
Other tax efficient investments include Enterprise Investment Schemes (EIS), Venture Capital Trusts (VCT) and Seed EIS (which may be suitable for small business investments where your shareholding is less than 30%).
You can invest up to £200,000 in a VCT which gives you 30% tax relief on the initial investment (if you hold it for 5 years); the VCT is also free of Capital Gains Tax (CGT). After 5 years you may be able to reinvest your initial investment and obtain a further 30% tax relief.
With EIS investments you can invest up to £1m and get 30% tax relief if you hold them for 3 years. There is an added benefit for an investor who has a CGT liability – this can be deferred by investing in EIS and after three years will become exempt.
The four million plus small businesses in the UK make a vital contribution to the British economy. However, with many still battling the financial pressures imposed by the recession, it is essential that business owners ensure the structure of their tax affairs is as cost effective as possible. Times are tough, so now more than ever, why pay more tax than you have to?