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In this quick guide we cover the key tax considerations for financial firms, from raising money, to calculating VAT and incentivising staff. We’ll also look at when the most enthusiastic tax efficiency practices stretch the letter of the law.
In the next blog we highlight some of the key tax and accounting rules to look out for plus efficiencies you may not be aware of.
How can financial firms raise money tax efficiently?
There is a good selection of tax advantage schemes for new and growing businesses raising cash. The Enterprise Investment Scheme (EIS) can help boutique financial firms raise finance quickly and cheaply. The scheme provides a range of tax reliefs to investors who purchase shares in smaller, higher risk trading businesses.
Similarly, the Seed Enterprise Scheme (SEIS) is ideal for startups. Both schemes offer significant income tax relief, freedom from Capital Gains Tax (CGT) – and the ability to defer or write off existing CGT bills – and reduced inheritance tax. All of which make your fledgling or growing financial business an attractive proposition to would-be shareholders – not least making your own capital go further.
If your business is eligible, it’s also worth investigating the Social Investment Tax Relief (SITR), a fund offering similar inducements for investors in social enterprises.
You can find out more at the EIS Association (EISA) the official trade body for the scheme.
Calculating VAT for financial firms
Unfortunately, there are often no short cuts when it comes to calculating VAT. Some financial firms can have quite complex returns; there are several forms of VAT, including standard, exempt, and out of scope services.
You should be clear on the exact nature of your services and to whom you are providing them. Your bill will vary if your customers are based within or outside the EU. Depending on the complexity of your accounts, it could be more profitable to engage a specialist to manage your returns in order to maximise the amount you can reclaim.
An alternative approach for start-ups is to take advantage of the VAT Flat Rate Scheme. The scheme allows businesses to simply pay a base rate of VAT and can be particularly useful if your firm’s expenses are higher than average. Simplifying the returns process – at the expense of potentially missing out on efficiencies – can also free up your resources and prove more cost-effective in the short term at least.
You always have the option to reclaim any excess tax later if you decide to subsequently work out your exact rate of VAT.
Minimise your tax obligations to incentivise staff
Share option schemes can be a great way to motivate employees. The Enterprise Management Incentives (EMI) scheme enables individuals to buy shares of up to £250,000 without paying Income Tax or National Insurance provided what they pay for the shares is not less than their market value when the option was granted.
Employers can claim corporation tax relief and don’t have to offer EMI options on equal terms to every employee or director.
When it comes to paying staff, most businesses have traditionally leaned towards dividends over salary. Dividends are less tax efficient than they once were, but that’s not to say they are no longer preferable. However, the particularities can be quite challenging so plan ahead and get help where you need it.
The thin line between avoidance and evasion
As a financial provider you’ll have experience in maximising margins and being creative with money. Just don’t get too creative. Every business wants to be as tax efficient as possible but there’s a thin line between avoidance and evasion.
Just where the line lies remains a hotly contested point but the spotlight is firmly on all businesses. Firms should avoid attracting the attention of the regulators and entering into battles they cannot win. It’s important to stay within the law and the spirit of the law. Look beyond the black and white of the legal text and consider the moral implications. What did Parliament intend? The Government is quick to target tax avoidance and new laws are apt to disrupt any adventurous structures you’ve established.
Identify all your obligations up front, scrutinise the details and weigh up your options. Ensure you’re aware of all the efficiencies to which you are entitled and establish a clear process for managing your returns.
Spending time on tax and streamlining your processes will ultimately increase your margins and allow you to invest more time and money into your business.
It’s also the safest option. HMRC can impose 15% tax-geared penalties across the board if any infringements are detected, which can make cutting corners a much less attractive proposition.
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