Your tax footprint

Over the last few years many multinational companies have been considering what their tax footprint is in the UK. Many of the larger companies have used their footprint as a political tool to lobby parliament and the make decisions as to where they base their operations. Others have used these figures to justify paying very low overall rates of corporation tax.

How is that relevant to us mere mortals. Well it is interesting to consider how big our own footprint is, and the implications of the footprint can give a bit of guidance to reducing how much we contribute to our national coffers.

Well I (delusionally) hear you ask what are you talking about, what exactly is this footprint. Well my definition is quite simply this:

Your tax footprint is any money that goes directly to the government as a result of your economic activity. This will extend to:

Corporation tax
Income tax
National insurance on employee wages
Employee tax payments
Fuel tax
Road fund licence

You could also quite legitimately include within the analysis compliance costs, which would include the part costs of maintaining records, accountancy compliance costs, payroll department costs and so on.

Let us put some meat to the bones by way of a very simple example.

Average & Co turn over 2m per year. Their staff force consists of 15 operatives who are paid on average 25k per year. They have 7 office staff that are paid on average 35k per year. They run a fleet of 5 vans and 5 cars of average specification, the mileage on each vehicle is 25,000 miles per year. The net profit of the business is 200,000 per year, out of which the owner managers take their drawings.

What is the tax footprint?

Employers NIC	74,602
Employees taxes	180,678
Motoring taxes	23,182
	278,462

Corporation tax	42,000
Tax on 'drawings'	39,500
	359,962

Where is the VAT?

This has not been included in the computations on the basis that, usually, (there are some special cases, especially retail businesses) VAT is not a cost to the business, just a compliance burden. We say this on the basis that your cheque to HMRC usually comprises VAT that you have collected from customers less VAT that you have already paid out.

If you are anything like us you might now be taking deep breaths and asking a few questions, all of which can be summarised in one question.

Question #1 how can I reduce my tax footprint?

It is interesting to conduct this exercise, purely from the perspective of assessing how much actually goes to HM Revenue and Customs as a result of your economic activity. However, practically speaking it also gives us some idea as to where the tax leakage might be and how it can be reduced.

Some taxes are inevitable and difficult to reduce in a practical way, for example we could all start using cycles, and remove the 23k in motoring taxes in one fell swoop interesting but no thank you.

Key issues to consider:

Tax efficient motoring

This is a subject that we are faced with every time we fill up our motor vehicles, especially in these times. The scope for reductions may be limited; however if a number of vehicles are being maintained in the business then there are opportunities to make savings:

Tax efficient (low CO2 emission) vehicles. These will save on fuel costs and employer taxes (especially if they are company cars).
Low depreciation motor vehicles. Bear in mind that the real cost owning a vehicle (as opposed to driving it which is generally equivalent between vehicles) is depreciation. Sometimes spending money on, say, an Audi, although slightly more expensive will be more economical than, say, an equivalent Ford Mondeo due to the high depreciation on one rather than the other. This is not a tax issue, and each case will stand on its own merits.

Tax efficient employee remuneration

There is only so much that you will be able to do with taxes on employee remuneration, but make sure that your give consideration to using remuneration methods designed to give tax breaks and motivate employees at the same time. Examples include:

Childcare voucher schemes
Executive Management Incentives
Property implemented Salary Sacrifice schemes
Facilitating employee pension contributions
Well thought out company car policy
Should your employees (and you!) have company cars in the business?

Corporation tax / income tax planning

Ensuring that the minimum amount of tax is paid on the bottom line is also a key area to plan for taxes. This can cross over with planning on the owner manager remuneration packages, however some issues to consider are as follows:

Ensuring that the business is structured in an effective way to reduce unnecessary tax burden, for example group structures or reducing the number of associated companies.
Efficient timing and structuring of larger capital equipment purchases, ensuring timely tax relief in the best way.
Maximising capital allowances on buildings

We could literally go on forever with planning the taxation of trading profits. Needless to say it is important that you have your business structured as efficiently as possible as early as possible.

Owner Drawings

This area of the tax leakage must be considered in light of all taxes including Inheritance Tax and Capital Gains Tax. However some key areas should be considered by all owner managers:

Efficient drawings policies, planning via dividends and salary structures.
The timing and documentation of drawings and ensuring that any tax relief falls within the correct account period.
Ensuring that all family members are rewarded appropriately for their input into the family business.
Tax efficient succession planning can reduce the tax burden on the ultimate drawing from the business the disposal.

Conclusion

We have introduced a mammoth subject in discussing all of our tax footprints. The topic extends in unique ways across all businesses large and small.

Reducing the tax burden comes back to planning in advance. There is little advantage to be gained in tax planning after the event.

If you wish to discuss any of the above matters, please do not hesitate to contact us.

Contact

tel: 0113 257 4506 fax: 0113 257 7086 email: taxation@bpr.co.uk