SMEs save THOUSANDS by “relaxing rules” to reduce their tax burden

Many British businesses feel they have no choice but to take advantage of lax business spending rules, a practice that has saved them £11.5bn in the past year alone.

Up to 78 percent of small and medium-sized businesses said they are willing to record non-labor expenses as expenses to reduce their tax liability, according to data from Xeinadin.

These companies saved an average of £2,670 each over the past year, the accounting firm said, with a quarter of businesses increasing their cost-cutting practices to cope with current financial strains.

This trend was particularly pronounced among companies with 150 to 249 employees, where 41 percent increased their non-compliance with the rules.

In many cases, this could involve purchasing equipment that is actually for personal use, exaggerating home broadband and utility costs, or paying for family meals under the guise that they are business-related.

Xeinadin said 46 percent of business owners who violated the rules admitted to claiming personal expenses, while 45 percent said they claimed travel expenses, such as claiming miles on personal trips.

Tim Halford, Commercial Director at Xeinadin, said: ‘Small businesses in the UK are facing significant challenges amid the current cost of living crisis and gaps in government support.

‘Our survey highlights a worrying trend: most SMEs are exploiting legal loopholes, highlighting the need for policymakers to review government incentives. This would support SMEs and alleviate the pressures that lead to such practices.

Worryingly, while 19 percent said they took advantage of tax loopholes because it was easy to do so, 49 percent of businesses said they did so because of pressures from the cost of living crisis, and 30 percent said they felt they were paying too much tax.

Halford said: “While the laws are in place for good reason, the data shows that business owners are using loopholes where the small, short-term financial gain most likely outweighs the risk of being caught mentally. We must remember that owners depend on the success of their businesses for their livelihood, their retirement plans or as a safeguard for their families’ future.”

Tightening the reins further, 38 percent of business owners said they did not benefit from any government incentives over the past year, a figure that rises to 72 percent of sole traders.

Meanwhile, 40 percent of business owners willing to work outside the rules said they were accepting cash payments to avoid taxes. Some business owners are also using in-kind payments.

Companies have few options

Wasim Riley, a business owner who runs Afrikana Kitchen in Manchester, told This is Money that businesses are having to turn to new ways of saving money to stay afloat.

He said: ‘The last decade has been brutal for businesses, especially SMEs, with excessive taxation, relentless bureaucracy and the fallout from Brexit.

‘The cost of living crisis has only made matters worse, driving up the price of goods and leaving many businesses running on a shoestring.

‘The cost of goods has not come down since it skyrocketed.

‘Add to that the lack of government support, and small businesses are at a breaking point and have no choice but to look for other avenues to obtain cash.

“It’s not about willfully breaking the rules, but rather about trying to protect the investment and the livelihoods linked to it.”

He added: “I sympathise with those who feel the need to bend the rules. I understand why this happens – when businesses don’t get the support they need, they have to find ways to survive.”

While many practices are illegal, companies are also employing ways to reduce their tax bill through legal loopholes.

For example, about 22 percent said they use dividend distributions to supplement the lower income they earn from their business.

Riley told This is Money: “Saving tax or extracting money from the business through alternative methods such as negotiating more favourable contracts, delaying payments to ease cash flow or entering into flexible leasing arrangements with landlords are practices that are not illegal, but they represent the lengths to which companies are prepared to go to stay afloat.”

“It’s hard to imagine how businesses will survive without taking even more drastic measures. I wouldn’t be surprised if more companies started finding ways to preserve their cash. It’s a harsh reality, but for many it’s a matter of survival.”