Fix tax traps to avoid

It’s easy to get bogged down in the UK’s vast quagmire of tax rules; here are some common tax traps to watch out for.

Assuming that you’re an employee of your business when you aren’t

If you’re running your business as a sole trader, you and your business are legally one and the same. You're self-employed and not an employee of your own business, so any money you take out of the business is called “drawings”, and you don’t need to run a payroll unless your business employs staff.

Not realising when you are an employee of the company

On the other hand, if you’re running your business through a limited company, then you and your business are not legally one and the same, which means that there are restrictions on how much money you can take out of the company without incurring extra tax. Here are the ways that as a director, you can take money out of the company:

  • The company can pay you a salary as an employee.
  • The company can pay you dividends on any shares you own in the company so long as there is enough profit in the company to cover the dividends.
  • The company can also pay you back for any expenses you personally incur on the company’s behalf (such as a train ticket you buy to visit your client, paid for on your own credit card).

If the company pays you anything over and above these amounts, then you could be at risk of extra tax and NI bills.

Using the VAT Flat Rate Scheme without being accepted first

You may want to join the VAT Flat Rate Scheme, as it's designed to save you time and could also save you cash. However, you have to apply to join the Flat Rate Scheme and be accepted on to it by HMRC before you can start using it.

Once you been accepted to join the VAT Flat Rate Scheme by HMRC, make sure that you mark this in your accounting software’s VAT settings - but not before!

Claiming too much tax relief on motoring costs

If you’re claiming tax relief on business journeys in your own car, you might be doing that by claiming HMRC’s set rate of 45p or 25p per mile.

Remember that if you’re using these mileage rates, they cover all the costs of buying and running the car, so you can’t also include in your accounts any costs such as petrol or repairs, and you can’t claim capital allowances on the cost of the car either.

The only other motoring costs you can claim when you’re using the mileage method are those that relate to a particular journey, such as road tolls or car parking tickets.

Check out this article for more details about motoring costs.

Water, water, everywhere and not a drop to claim

If you’re working in your own home, you may be able to claim a percentage of your home running costs in your accounts.

However, one home running cost that you can’t include is water, unless your business incurs heavy water usage and is supplied by a separate pipe from your domestic supply. For example, if you run a home laundry service or dog grooming parlour, you could include this cost. Any additional water use from extra drinks or toilet flushes unfortunately doesn’t count as a business cost.

Some of these tax traps can be tricky, so we recommend working with your accountant to help you and your business avoid falling into the quagmire! If you don’t have an accountant, check out our directory of FreeAgent friendly ones!

Disclaimer: The content included in this guide is based on our understanding of tax law at the time of publication. It may be subject to change and may not be applicable to your circumstances, so should not be relied upon. You are responsible for complying with tax law and should seek independent advice if you require further information about the content included in this guide. If you don't have an accountant, take a look at our directory to find a FreeAgent Practice Partner based in your local area.