Tax relief – what is it and how do you get some?

Do you want a tax bill of zero?

Many people will do almost anything to avoid paying tax… I can reduce your tax bill to a big fat zero – legally.

Let’s forget about the shenanigans of the likes of a mobile phone company, or a coffee shop chain or a certain comedian, but concentrate on what is our real world.

Before I explain how, I think I ought to explain a few principles about tax relief.

There are really two types of tax relief

–          There is the relief a business receives as a result of its normal business activities
and

–          There is the relief given by certain tax allowances given to individuals and businesses by the tax system itself.

Both of the above have a “cost” in order to obtain that tax relief and this is the point of this article.

I will just keep things simple in the following examples…

Looking at the first category:
A business may have to incur expenditure on repairing a machine that it uses in its everyday course of working – if, for example, it spends £ 1,000 on repairing that machine then that cost will appear in the profit and loss account and will reduce the profit by £ 1,000. As a result the business will typically save £ 200 in tax (a sole trader or partnership may save 9% NI too, but I am only looking at tax relief here). You can also include capital allowances in this category too, although the rates of relief can vary.

In the second category:

An individual may pay £ 1,000 into his or her pension fund. In this case the Government will top up that contribution by also putting £250 into that pension pot – in addition a higher rate taxpayer will save a further £250 on their tax bill when the self-assessment tax return is prepared.

The simple matter is that to obtain some tax relief you have to spend money – in very simple terms you have to spend £ 1,000 to save £200 in tax (higher rate taxpayers may save £ 400 or even £450).

Now to the point of why you are reading this article – how can I reduce your tax bill to zero – legally.

Keeping things simple and assuming that a sole trader has no other sources of income, in the current tax year you can earn £10,000 tax free so the object would be to reduce your profits to £10,000, whereupon your tax bill becomes zero. My tax saving measure is to invoice you for my accounting and tax expertise. Let’s assume your profits are £ 25,000; I can invoice you £ 15,000 and this will reduce your profits to £ 10,000 and your tax bill disappears as if by magic. Being honest I will declare my income (the £ 15,000) and pay the tax due on it. Can you see what has happened? You have spent £ 15,000 to save tax of £ 3,000 and given me £ 15,000 and I’ll pay the tax on it – I really don’t mind paying the tax on £ 15,000 .. even if that tax was £ 6,750 I’d still have £ 8,250 in my bank account and you wouldn’t have the £ 15,000!

The point I am making is that you have to spend money in order to save tax!

On a serious note, there are times when you have to spend money in your business and getting the tax relief should be seen as a bonus. So spend that money – but don’t spend money simply to obtain some tax relief.

The common question revolves around vehicles used in a business. Vans are great as they attract 100% tax relief (although see my blog on the Annual Investment Allowance). Cars can vary from being great to being useless as far as tax relief is concerned. For example a low emissions car with CO2 emissions less than 95g/km will attract tax relief at 100%. That’s good news on the tax front and on the “green” front, but if you prefer a car with high emissions (for whatever reason) the capital allowances will fall through 18% and as low as 8%. Take a high emissions car costing £ 20,000 .. the tax saving would be a paltry £320; and that’s before any private use adjustments!

So in summary, don’t seek out tax relief for tax relief’s sake because it will cost you more cash and if you do need to spend then spend it on the right type of asset.

I’ve never had anyone take me up on my masterplan to reduce their tax to zero, I’m sure you can understand why. Although this article is very much ”tongue in cheek”, it does have a serious note to it.