What can small businesses do to be more financially viable?

At Haines Watts, a large proportion of our client base are small and medium sized entities (SMEs), many of which are also owner-managed businesses (OMBs). It’s been a tough time for smaller businesses over the last few years, as they have been hard hit by Covid and its aftereffects, with only certain businesses and sectors receiving help from the government, and that help was temporary in most cases. Following on from that, the cost-of-living crisis has meant a rise in inflation, and a reduction in people’s disposable income, linked with the stagnation of wages in recent years. All these factors have resulted in small businesses finding it difficult to turn a profit and keep people employed and customers satisfied.

So, from an accountant's perspective, what can small businesses do to make the world of work more financially viable?

 

Business Set Up

Over the last twenty years I have seen a trend towards small businesses incorporating a limited company. The motivation for this has predominantly been to reduce the tax burden, as generally tax is more favourable within a limited company situation. However, in more recent years, the government have been moving towards equalising taxes for self-employed sole traders and partnerships compared to that of limited company owners, and with the administration and legal costs involved in running a limited company, it may now not be necessarily more cost effective to have that limited company set up.

The limited company does of course also provide the commercial benefit of limited liability, which can be particularly important in certain sectors where risk is inherent in the business. Limited companies can protect your personal assets from the potential liabilities of the company. However, if this is not a concern in your situation, and you are looking to start a business, it is sensible to consider the various options and a sole trade may offer best value for money when starting out. An accountant could advise based on your specific circumstances what the optimum set up would be, taking risk considerations and projected profits into account.

 

Tax Reliefs

Many small businesses employ an accountant because they know the ins and outs of the tax legislation and understand what deductions are available. There are many legitimate allowances available which business owners can take advantage of to reduce their tax bill and these are the most popular ones that I have seen in recent years:

 

• Mileage allowance for personal cars – 45p per mile can be claimed for every recorded business mile up to 10,000 miles per tax year, and 25p on subsequent miles
• Use of home – working from home means that certain household costs could be set off against your profits
• Capital allowances – the purchase of capital items, for example, computers, vans, machinery, can be offset against profits using the capital allowances rules. At present these can be quite generous, allowing 100% of the value of the asset to be deducted against profit in the year of purchase
• Employment allowance – if you employ staff, if criteria are met you could qualify for a deduction of £5,000 off your employer’s National Insurance bill per tax year
• Charitable donations relief – in the same way that individuals can claim gift aid on charity donations, profitable limited companies can also have tax relief on donations made to registered charities
• Research & development – if you work in a scientific or technical sector, and are developing innovative products, you may have grounds for an R&D claim, which can generate tax credits and raise cash to support the development stage of projects before profits are made.

An accountant can help advise and calculate the reliefs available and assist with providing analysis on eligibility and any impact on other provisions.

 

Grants and Services

Both HMRC and local councils have services available for new businesses and offers of grants to help out. It is worth checking their web pages to see what is available. Small businesses often take the brunt of an economic downturn, but knowing where to look for assistance can make the difference between profit and loss so I have set out some further detail on a few of these below:

The government provide start up loans for businesses, of up to £25,000, which also includes access to support and guidance in writing a business plan, and mentoring assistance for successful applicants:

https://www.gov.uk/apply-start-up-loan

They also keep a detailed list of current grants available which can be filtered by different industries, business stage, and geographical area:

https://www.gov.uk/business-finance-support

Finally, Bristol City Council provides a variety of support services for new businesses, ranging from financial support and helpful resources, through to grants, reliefs, and support with employees and local licensing:

https://www.bristol.gov.uk/business/business-support-and-advice/starting-a-new-business

https://www.bristol.gov.uk/business/business-support-and-advice/business-finance

 

Please note that the information in this article is based on tax laws in effect at the time of writing. It is always advisable to consult a professional advisor for detailed guidance prior to undertaking any financial transactions.