...But do you know what Tax you want to save?
I want to tell you a quick story about one of the local Veterinary Practices I act for. In order to save the most tax, they had been advised by a previous accountant to incorporate their practice (turn it into a limited company as opposed to a partnership or sole trade) and transfer the building that the practice operated from into the company too.
ÂSave me Tax!' Â The most common outcry we hear as accountants, undoubtedly worldwide. This is, after all, the reason we have an all-singing all-dancing tax department and a 21 year history ofÂ specialisedÂ tax planning. But, what appears to be a simple ask actually has to be treated with a great deal of consideration, in order to avoid a reply of:
ÂI have saved you tax now that has actually cost you a lot of tax in the futureÂ.
There are more than 10 tax systems that might affect you at various stages of your financial life Â Income Tax, National Insurance, VAT, Corporation Tax, Capital Gains Tax, Inheritance Tax and Stamp Duty Taxes, to name the most common. Bad accounting advice might cause you to save one of these, at the cost of another. If I were to suggest some tax planning that saves taxÂ now, but means that somewhere down the line there's a liability looming, it suggests I'm not doing my job properly, and not providing true professional care. This is something we want to avoid at all costs!
This is why, when I'm asked ÂCan you save me Tax?Â I ask straight back:
ÂWhat do you want to be doing in 5-10 years' time?Â
In the case of my local Veterinary Practice - Yes, transferring to a limited company would mean there'd be no tax to payÂ nowÂ on incorporating, and yes, profits would then be taxed at 20% rather than the personal tax rates Â potentially saving 29% of tax each year.ButÂ there are some other considerations to account for:
What if the practice owner wanted to retire in five years' time? They would sell the veterinary practice, but would they want to sell the building? If they didn't sell the building, they'd still have to keep the company running even after the Practice (the core business) was sold, because the property is in the company name. In this scenario, the tax on selling the practice hasÂ doubled.Â Saving income tax on putting the property in in year one has cost additional Corporation tax and income tax in year 5.Â An additional tax cost of 42.5% OUCHÂ
Â There's a happy end to this story. In this case, my advice was based on asking what practice owner's their plan was for the future, and from that plan we worked on structuring. In the end we saved overÂ Â£40,000 in tax for owners of the Vet Practice and were able to safeguard the future tax position and options for the property. Careful consideration meant we could choose the right option for the longest possible future, instead of chasing the highest immediate saving and hoping that some poor blighter would take the rap when the tax bill eventually strikes!
The moral of the story? Your 5-10 year plan is important in determining what tax you want to save. Find an accountant whoÂ specialisesÂ in Business Advice for Veterinary Practices to discuss this with you and make the headaches go away. Do they exist? Funny you should mentionÂ
JoshÂ CurtiesÂ is a Principal Adviser and Senior Client Manager here atÂ A4G. Josh advises businesses in many different industries, but is also a specialist in the Veterinary Industry, an area where his broad range of experience and straight forward approach has proved useful to many practices across the country.Â