Planning for profit: tax-efficient practices

With some in the veterinary profession being concerned about profitability – the BVA expressed worry over this in 2016 and the matter hasn’t gone away – taking every step possible to lower cost is essential, and tax planning is part of this.

In this article are some top tips to minimise tax costs to your business while keeping you on the right side of HMRC.

Business structure

A veterinary business might typically operate as a sole practitioner, with one individual employing staff as the business grows; a partnership with two or more partners in business together, sharing profits or losses; a limited company which is a separate legal entity, with the owner/managers commonly taking the combined position of directors and shareholders; or a limited liability partnership, which is a hybrid between a partnership and a limited company, taxed broadly as a partnership.

Each structure has pros and cons when it comes to tax, administration, liability and wider business considerations, but the choice isn’t necessarily a one-off decision.

Businesses typically follow a life cycle from start-up through to eventual sale or closure, during which the most tax-efficient structure may change.

It’s worth taking professional advice on business structure a few years in advance of major events, such as expansion, sale or retirement to make sure you can optimise your tax position.

Professional advice

It is vital to get good advice throughout the life cycle of your business on the big issues, such as structure down to day-to-day compliance.

A suitably qualified accountant or tax advisor can assess your business, along with the personal tax position of its owner/managers.

By looking at the complete picture, including senior stakeholders’ personal and family circumstances, tax efficiencies can normally be found, and plans put in place for longer-term objectives.

Remuneration planning

As a business grows, incorporation may be tax efficient in order to benefit from lower rates of corporation tax compared with income tax. The downside is that this introduces a second layer of taxation – corporation tax is due by the company and then personal taxes are payable on extracting profits to the owner/manager.

However, a company structure allows control over how much of the business income the owner/manager is taxable on, allowing them to maximise use of their lower rate tax bands each year. This can be especially valuable in the event of business profits fluctuating as it allows profits to be kept within the company in good years to reduce the owner/manager’s exposure to the top rates of income tax.

By comparison, a sole trader would be liable to tax on a bumper year’s profits in full. Equally, if the company has lean years, the owner/manager may still be able to extract company reserves as salary/dividend to make use of their personal tax allowances and basic rate tax band.

The remuneration package of owner/managers who are also directors and shareholders of incorporated practices can be tailored for tax efficiency, balancing their personal tax position with the cost to the company.

Unlike dividends, salaries are an allowable expense when calculating a company’s taxable profits, so it may appear sensible to remunerate the owner/manager with just salary. However, National Insurance contributions (NICs) apply to salaries for both the company and the recipient. Meanwhile, dividends are not subject to NICs and the recipient pays lower tax rates than they do on salary, so a balancing act exists between the two.

Consideration of NICs is also important, as they provide for future state pension entitlement along with other state benefits. For this reason, a typical approach is to pay salary equivalent to at least the secondary threshold (£9,100) to ensure a year “counts” for state pension contributions, but probably no more than the personal allowance (£12,570), above which PAYE starts to be incurred.

Claim business costs paid personally

While ideally all business expenses should go through the practice records, sometimes this doesn’t happen. Sole practitioners and partnerships can claim tax relief for business expenses paid for by the owner/manager. The most common examples are the owner using their own vehicle for business purposes, or using their home as a place of work. Costs associated with both can be claimed against the business profits, reducing the tax payable.

Tax relief can be claimed on a simplified basis – mileage at 45p per mile for up to 10,000 business miles per year, and 25p thereafter, while use of home as an office can be claimed at between £10 and £26 per month, depending on the number of hours worked from home. Alternatively, the actual costs of the business use of car/home can be calculated as a proportion of the total running costs in the year.

In most cases, the simplified options provide valuable tax relief without adding excessive record-keeping burdens – you just need to log the business miles driven or hours worked at home.

Tax-efficient benefits for staff

Non-cash remuneration from a company can be highly tax efficient. This won’t apply to owner/managers of sole practices or partnerships, but is an option for any employees they take on.

Certain benefits in kind, such as employer pension contributions, providing one mobile phone per employee and free staff canteens, can be provided tax-free to employees and directors. Staff events such as an annual Christmas party or other annual function can also be laid on tax-free, as long as the total cost for all events in the year does not exceed £150 per head. The costs of these perks can also be claimed against the company’s taxable profits.

Electric cars can no longer be provided tax-free to employees, but until April 2025, they only attract a benefit in kind charge based on 2% of the list price. So, a £50,000 electric car provided to an employee or director will result in a £200 annual tax charge for a basic rate taxpayer, or £400 for a higher rate taxpayer. If the business leases the car, those costs can be claimed when calculating the business’ taxable trading profits. If the business buys the car outright, the full purchase cost can be claimed in the year of purchase, as long as this is before 31 March 2025. Electric cars are also tax-efficient for unincorporated businesses, which can claim the full cost of purchasing before 5 April 2025, or ongoing leasing costs. Both are subject to a restriction for any private use of the vehicle.

Salary sacrifice pension contributions remain tax efficient. If an employee gives up the right to part of their gross salary, the employer can pay that amount into a pension scheme on the employee’s behalf, saving tax for the employee and NIC for both the employee and the employer.

“Trivial benefits” valued at up to £50 each can be provided tax-free to employees, as long as they are not a reward for services and are not cash or cash equivalent vouchers. Directors are generally limited to £300 of trivial benefits per tax year.

Claim capital allowances… normally

The cost of buying capital items (generally anything with lasting value to the business, such as machinery, furniture or vehicles) doesn’t count as an expense when calculating taxable profits. Instead, capital allowances can be claimed in respect of these assets, both for limited companies and unincorporated businesses.

For instance, the annual investment allowance (AIA) allows up to £1m of expenditure on eligible items (excluding cars) to be deducted from trading profits each year.

Until 31 March 2026, limited companies can also benefit from “full expensing”, which allows unlimited corporation tax relief on eligible capital expenditure. In practice, this will only be of benefit to the very largest companies, where qualifying purchases in a year exceed the £1 million AIA limit. Capital allowances need to be claimed each year. Doing so will generally reduce the tax payable, but if a business makes a loss, it is often better not to claim capital allowances that year. This will increase the tax relief available for capital items in later years, once the business makes a profit.

Think long term

If you want to sell the business, you need to think about your exit strategy. A capital gains tax (CGT) charge is likely to apply, with rates of up to 20% on the growth in the business value. If you structure your business so it qualifies for business asset disposal relief, you could access a 10% CGT rate on up to £1 million of capital gains. The planning required depends on whether your business is unincorporated or run as a limited company, and professional advice is crucial.

You may not envisage running your business forever, but you should still think about inheritance tax (IHT). A trading business can often qualify for 100% relief from IHT, thanks to business property relief, which can provide a huge tax saving whether you plan to pass your business on in lifetime or when you die. If you don’t structure your business carefully, you may miss out on IHT relief.

Right first time

The incentive to minimise tax bills is clear, but it’s vital that your business pays the correct amount – no more and no less than required. It’s best to avoid tax schemes that sail too close to the wind, as these can lead to HMRC investigations, sleepless nights and unexpected tax bills. The old adage of “if something seems too good to be true, it normally is” will often serve you well when it comes to tax.