What are the main objectives of tax planning?
Personal Tax Planning,
Corporate Tax Planning,
Tax Reliefs (including R&D)
Tax planning is a key part of running any successful business. The main objectives of tax planning will depend on your goals, business structure and resources, making it a flexible tool for achieving your personal and professional aims. By building proactive strategies and working within the available reliefs and resources available, business owners can maximise available capital and income while reducing their tax burdens.
Kapil Davda explains the role that effective tax planning can play in running your business, the main objectives and how they evolve with your needs as well as how to effectively collaborate with an advisor to optimise your tax burden.
What is tax planning for SMEs?
The main goal of tax planning is to structure payable taxes to manage the burden on the taxpayer. This could be from both a business and personal perspective.
The objectives of tax planning are twofold:
- Minimise tax liabilities (employment, corporate, sales, property, etc)
- Maximise the time before tax needs to be paid
This gives business owners more control over the way they can deploy capital, how revenues are managed and the amount of income they personally receive from the business.
Business taxes can include corporation tax, VAT, customs and duties, while personal tax planning will take into account income taxes, inheritance tax, capital gains and equity management within the business. Tax planning can be reactive – managing tax burdens as they arise and mitigating the impact with available reliefs and allocations - or proactive.
The latter approach is the most effective tool for aligning tax strategy with the business’s needs, building tax planning into future plans in order to maximise the utility of investments and business structures.
It’s important to emphasise that tax planning is not the same as tax evasion (which is illegal). Tax planning is based on making sure expenditure, business structures and strategies are set up to use capital in the most effective way to take advantage of all legal reliefs and schemes so businesses and their owners pay their fair share of tax within the law.
What are the main objectives of tax planning?
Tax planning strategy is dependent on the overall goals of the business and should evolve with the business itself, as well as the regulatory and commercial environment.
Tax planning objectives for new businesses
During the early stages of starting a company, the tax planning should aim to maximise available cash flow and optimise spending and investments in growth to reduce the potential tax burden.
Tax planning should focus on planned investments in equipment and people to target those that can be aligned with available reliefs to reach positive cashflow by claiming benefits, such as R&D tax credits, tax efficient benefits in kind, share option (EMI) schemes and allocating spending within optimal tax windows.
Tax planning can also reduce VAT exposure by dealing with accounting on a cash basis - linking VAT payments to cash received rather than invoices issued to align VAT with cashflow.
Tax planning objectives for mature businesses
Once established, tax planning can help more mature businesses optimise their revenue flows for efficient operational spending and maximising reimbursements for owners. Business owners have the opportunity to balance their incomes between salaries and dividends, with different tax burdens on each.
Salaries are eligible for PAYE tax and National Insurance payments, tiered according to income, while dividends are taxed at a lower rate at some levels. The precise allocation of income between the two forms of income will depend on the level of capital being disbursed as well as changes in legislation.
Even once your business is established and stable, tax planning can’t remain static. Legislation changes regularly requiring strategies to be revisited and updated on a continual basis to take advantage of changes in tax policy.
Tax planning objectives for succession planning
Towards the end of a business’s life, tax planning is an essential tool for maximising the capital released from a sale. Passing on high-value assets or wealth directly leaves the recipient liable for Inheritance Tax (IHT), the standard rate for which is 40% once over the allowable threshold.
A family holding company can hold the assets to be passed on, with the next generation instead receiving controlling shares in the company. However, these schemes need to be set up within certain time frames to be compliant and effective, meaning that proactive planning is key.
How to ensure tax planning success
Tax planning is a moving target, both from the business and regulator points of view. For that reason, it’s essential that you start your tax planning early and review it regularly as your objectives change.
Working with an advisor can help you adapt your tax planning to the needs of your business, your life and your family to ensure that you have the resources and flexibility you need to achieve your goals in every area.
The more time, advice and flexibility you have for planning, the more options you have when it comes to tax planning. Many of the most useful schemes are time sensitive, requiring schemes to be in place for certain timeframes.
Get in touch to talk through how you can create a tax plan that meets your needs in the long term to get more from your business.