What is the purpose of tax planning?

You might think that tax planning isn’t the most exciting part of managing your finances. But the reality is that a good tax plan is the bedrock for keeping your tax costs lower and helping you make the most of your money. Whether it’s mitigating your corporation tax bill, or reducing the tax liabilities on your personal wealth, tax planning should be a regular part of your strategy.

In this blog we outline the main reasons for putting tax planning at the heart of your finance conversations, and outlines some of the ways you can reduce your tax spending.

Why do I need to think about tax planning?

When you’re running a business, having a plan is always better than no plan. And thinking about your tax planning is something that definitely requires some time and thought if you’re going to get the best out of your money and your business.

Paying tax is a necessary part of making a profit. But what you can’t do is pretend that these tax liabilities don’t exist. The more you focus on your tax planning, the more control you have over the process. In a nutshell, tax planning is about looking at your tax position and coming up with a plan that mitigates the most tax, through legal and legitimate ways.

And there are lots of ways to do this:

• You might want to reduce your corporation tax liabilities, so you can reinvest more money back in the business

• You may want to look at tax reliefs, like R&D tax credits or Patent Box, to cover your research and development projects.

• You may want to reduce your exposure to capital gains tax, or lower your family’s exposure to inheritance tax when you pass on your estate to them.

• You could look at increasing your pension contributions to reduce the excess cash that’s currently sitting in the company’s cash reserves.

• Or you could look at being more effective with the planning of your quarterly VAT payments, so you have the VAT money put away ready to make the payment.

Tax planning is about looking at all the tax options for the future and making sure that you plan sensibly and effectively to bring down your tax costs.

What’s the starting point for any good tax plan?

When you start any tax conversation, it’s a good idea to pin down your goals and objectives from the tax planning process.

Businesspeople lead busy lives, and many of us don’t want to think too far into the future. Some owner-managers will prefer to act on a big tax bill when it happens. But waiting until the bill arrives is leaving it too late. 

If you’re going to effectively cover your tax costs, you need to prepare well in advance. And this is where having a long-term plan is so important.

It could be something as small as bringing a relief forward to the most beneficial tax year. For example, you might want to buy some expensive machinery to help you grow the business. If you make this purchase one day before the year-end (rather than waiting until after the year-end), that can make a big difference to your corporation tax (CT) liability for the year. By using your company profits to buy this new equipment, your total profits for the year are smaller, your CT liability is reduced and you pay less tax in total. That leaves you with more money in your pocket to fund your growth strategy.

Small things can make a big difference. And what you focus on in your tax planning will depend on your goals and your circumstances as an owner-manager.

How can working with a trusted adviser help your wealth management?

It’s vital that your tax planning process doesn’t just look at the business. It’s equally important to look at your personal goals and how you can manage wealth in the most efficient ways possible.
When we work with new owner-manager clients, one of the first things we want to talk about is your personal objectives as an entrepreneur and business owner.

For example:

• What are your life goals and objectives for the next few years?

• What’s your desired lifestyle and how much income do you need to achieve that?

• What are your plans for retirement or for exiting the business and making a profit?

At Haines Watts, we get to know your objectives and can break down your financial plans to look for the best tax-planning opportunities. It’s about finding out whether your business is in the right place and if you, as an individual, are in the right place too.

As a starting point, you might want to consider an investment portfolio that gives good returns and puts you in a better position. Or you may even want to reduce the tax liability of your spouse or your children, to improve their tax position and reduce their exposure to certain taxes.

The key thing we’ll do is show you the ‘before and after’ numbers for your tax liabilities. Once you see how much more you’ll pay in tax if you do nothing, it becomes much more pressing to get the tax planning ball rolling.

Tax planning is also not a static process. Your planning should be updated every two years, but many people don’t do this. Yes, there is a cost to engaging advisers, but the benefits of doing this far outweigh it.

Can tax planning also help to manage my risk levels?

Managing risk is another area to think about. Unexpected events, like the Covid pandemic, can change your planning significantly. You might suddenly find that your business model doesn’t work and that you don’t have the cash to fulfil your planned lifestyle. Or you might find that your investments are no longer performing as planned.

This is why regular tax planning is so important, so we can assess the risks, look at your options and guide you in the right direction.

• You might think about restructuring your business and putting your excess cash into a new holding company.

• You might consider taking the dividends you’re due from the company and putting them into a high interest savings account.

• You want to invest in buy-to-let properties and aim to get a good return as the value of your portfolio grows.

Everyone wants a low risk business, but working with a ‘it won’t happen to me’ kind of outlook can prove disastrous. Working closely with your accountant and your financial adviser is the best way to make sure you can ride out the ups and downs in the market.

What does the future hold for tax planning?

We’re living in uncertain times at the moment. As a UK-based owner-manager, you’re coping with the challenges of Covid, Brexit, global supply chain issues and the threat of conflict in Europe. That’s a highly changeable landscape to navigate, and your tax planning will almost certainly need to change and evolve on a regular basis.

By having regular tax-planning conversations, we can help you manage your liabilities, reduce your overall risk and deliver the best possible returns on your business profits and private wealth. Talking about your planning should really be second nature in every meeting you have with your advisers, and we recommend making it a regular agenda point.

Technical innovation, like HMRC’s Making Tax Digital initiative, are starting to change things. Once you’re paying your taxes every quarter, rather than annually, this makes tax planning a more frequent part of the conversation.

Talk to us about your tax planning needs

If you don’t want to end up with a significant tax liability in three years’ time, you need to do something now to manage that. As the old saying goes, the only two certainties in life are death and taxes – it’s best to get in control of those taxes and put yourself in the driving seat.

If you’d like to improve your tax costs and reduce the risks in running your business, we’d love to talk to you about the options that are available.

Get in touch with our tax experts to book a tax planning conversation.