How to structure your tax affairs effectively to enable your business to grow

It is a well-trodden path for director-shareholders to pay themselves a nominal salary (£8,788 is the magic number for 2020/21 where no PAYE or NIC is payable but is sufficient enough to obtain your NI credits for second pensions and NHS credits) and to top this up with dividends. However, the company must have sufficient reserves to pay dividends, the corporation tax rate is due to significantly increase from April 2023 and relevant earnings will be low for personal pension contributions. The key is to have flexibility as not every situation or even every year will be the same. You also need to consider your cash flow needs and what you require to live on.

A tax efficient share scheme can help you attract and retain key talent in your business, which can be essential to drive its growth. One such share scheme is the Enterprise Management Incentive (EMI) which enables you to provide your most valued employees with share options in the business. Once the individuals exercises their options and become shareholders, this could allow you to make payments in the form of a dividend, of which the first £2,000 could be tax free. The scheme is flexible so you can choose to run it as an exit-only option, which means that the individual will only realise some value if the business is sold, or you can set it up so individuals have exercised some options, which makes them shareholders allowing them to be entitled to dividend income as the business grows. The scheme is open to SMEs which have less than 250 employees.

As you grow your business you may well be innovating, perhaps through making or improving a new product or improving processes. If so, then you need to ensure that you are taking advantage of HMRC’s Research and Development (R&D) tax relief. The tax relief is designed to incentivise businesses to innovate and can make a big difference to cash flow - if you spend £100,000 on qualifying R&D activity, for example, you may obtain a tax refund of up to £25,000, or in the case of a loss-making company up to £33,000. The definition of R&D can be applied quite widely so it is worth checking to see whether your business would qualify.

In the latest Budget HMRC also introduced an extended form of capital expenditure tax relief called a super-deduction, valid for the next two years from 1 April 2021, in which companies spending money on capital expenditure can get a super-deduction capital allowance of up to 130% off their taxable profits on new qualifying plant and machinery expenditure.

It can sometimes be difficult for a business to get external funding so there are some tried and tested tax efficient structures to help growing SMEs attract investment from high net worth individuals. The EIS and SEIS structures, for example, allow individuals who invest in your companies to get tax relief of 30% and 50% respectively. And if the individual holds the investments for a certain period of time then any gain they make when it is realised is tax free.

Selling the business may be far from your mind at the moment but it is worth bearing in mind that you way you structure the ownership can make a big difference to the capital gains tax you will ultimately need to pay. Qualifying shareholders in the business can claim up to £1 million in Business Asset Disposal Relief – formerly known as Entrepreneurs Relief – so it may make sense to make other family members, who are involved in the business, shareholders before the time comes to sell. They will need to have held the shares for at least two years, though, so you need to plan ahead.