Tax planning for the key events in your business lifecycle

There are so many things to consider when setting up a business it can be hard to keep focused. Getting that first client through the door is often the priority and then of course there are all of those exciting things like the name, the logo, the website and so on. However in the midst of that frenetic ‘start-up’ phase deciding on the type of business structure to adopt can have huge tax implications for your first few years of trading and beyond.

Kapil Davda explains how getting your tax strategy and planning right throughout the life cycle of your business can reap rewards and avoid common pitfalls.

Get up and go!

At the beginning there are different options to consider, such as being a sole trader or a limited company, with differing tax rates, but there are also other aspects to consider before you decide. It’s crucial at this stage to seek professional advice to work out which structure will be best for you and your vision for the future of your business.

You could be looking for something structured quite differently depending on whether this is a business you want to establish, grow and pass down through generations or whether it is a business you plan to set up and sell in five years’ time for the highest offer.

You may be anticipating aggressive growth for the first few years and therefore need a structure that will accommodate this or you may be planning for a business that will stay small land easily managed.

Depending on the turnover and profit you have anticipated in your business plan, you may start life as a sole trader but then move to become a limited company. This can be easier than the other way round but there are tax implications to consider either way.

It's not uncommon to speak to business owners who are perhaps eighteen months into trading and have realised their business structure is simply not fit for purpose. This is often due to lack of professional advice at the start. Unravelling a business to put a new structure around it can be much more time consuming and complicated than just investing some time at the beginning.

As a limited company, you can extract your profits through dividends, salaries or a combination of both and may also be able to take advantage of certain applicable tax reliefs, such as Research and Development tax credits, which can provide tax efficiencies. As a sole trader or partnership, your options are limited though there may be other advantages such as lower compliance and professional fees. By seeking professional advice to discuss these options you can make an informed decision which will stand you in better stead in the long run.

From a standing start to a sprint but in which direction?

Once you are up and running, you’ll want to consider what’s next for your business. Is the market booming with acquisitions? If you’re thinking about selling to a bigger player once you reach a certain size then start planning now for how your exit can be managed. You will need a tax strategy that supports your short term goals and long term plan for the future.

However, if your focus is on growing the business and passing it on, you’ll need to consider the tax implications of that plan including inheritance tax and how that applies to business assets even now.

Even if you’re not considering selling or passing your business on for some time, it’s important to have a good foundation and tax strategy that will allow your business to evolve without any tax pitfalls.

Once your business is established and cashflow is healthy and steady, there are also various benefits in kind that it may be worth taking advantage of for tax efficiencies such as health cover, insurance, company cars and pension payments. You may find that your business profits go much further.

Planning your exit

Once you’ve reached the heady heights of a well-established business you’ll hopefully have a good tax strategy in place from previous conversations with your business advisors. However if you’re still unsure of what the tax implications are for a sale and how a deal should be structured for maximum tax efficiencies then now is the time to seek advice.

Capital gains tax is usually applicable to anything above £12,000 of capital gains, so business owners need careful planning in place to minimise exposure. This can be very dependent on how a sale is structured and elements such as the time period agreed and whether the business is selling shares and/or assets. There may be advantages in extracting the profit from a business sale over a number of years but it all depends on your personal situation.

When exiting a business, it’s also worth spending a bit of time thinking about what you want to achieve.

• Will you want to continue working with that business or move in a completely different direction?

• What does the buyer want from your business?

It might be beneficial to continue its growth as a single entity, extract cash and other valuable assets, or transfer them to another business. The way you sell your business needs to suit both parties and sometimes a carefully planned deal structure can result in more profit than just a higher sale price.

If, rather than selling your business, you are passing it on to family members, then there are further tax implications and reliefs to consider such as inheritance tax and gift hold-over relief. There may be emotional issues at play when dealing with relatives or your children so it’s important to have an impartial adviser to help you negotiate the best circumstances for all.

If you are retiring following the sale of your business then your pension will be front of mind. Pension payments can be made from a business and this is also something to consider at every stage.

Whilst you may not have the cashflow to support pension payments at the very start of a business, once it has reached a certain level of maturity it could be a very tax efficient move to pension payments in earnest.

For tax advice at any stage of your business planning, get in touch and we can help.