Business start-ups rightly focus on how to make money. At the same time, newly formed businesses have an important tax planning opportunity.
Business formation - whether to set up as a company or sole trader, as an example - can make a big difference to your future tax bills.
Forming a new business
A start-up has several options when it comes to the legal structure of the new business. The simplest business set up is as a sole trader, while other options include formation as a partnership, limited liability company or limited liability partnership (LLP).
Each way of forming your new business has different tax consequences, as well as other implications, such as the extent of your personal liability for business debts. The date of your business accounting year-end can also affect the level of taxable profits and how long you have to pay any tax due.
Depending on your business set up, you will also want to identify the most tax-efficient way to withdraw profits from your new business, for example, by paying dividends (if you set up a company) or by making tax-efficient pension contributions. A business start-up may also want to consider tax-efficient ways of rewarding and incentivising key employees.
Financing a new business
Business start-up financing can also have significant tax implications. Your tax planning should look at the overall tax consequences of your new business financing.
For example, interest payments on loan finance are tax deductible. But if friends or family lend money to your new business, they will be liable to income tax on any interest they receive. Your business start-up tax planning may also need to take into account the tax consequences for any investors, for example, whether they qualify for tax relief on their investments or when they later sell their share of the business.
Other business start-up tax planning issues
Your business start-up may involve a number of other tax-planning issues. For example, you will want to ensure that you can set as many pre-start and start up costs against tax as possible (and recover VAT on these costs if you’re VAT registered).
If the new business uses assets you own, you should investigate the most tax-efficient options. This can apply to both physical assets such as premises and intangible assets such as any intellectual property you have developed. If the new business is acquiring substantial premises, there may be opportunities to minimise the stamp duty land tax payable.
Larger business start-ups may need to consider international tax planning, or to assess the pros and cons of business formation as a single company or as several companies within a group.
If you are starting a new business, taking advice on all aspects of business taxation will help ensure you get the business set up the right way from the outset. You can also build this advice into your business plan.
Related articles and resources
You may find the following articles and resources useful: