Do small businesses/sole traders normally avoid tax?

So, I recently went out self-employed as a sole trader (IT repair and sales, pretty standard). Margins are a bit thin and it isn't exactly easy money, but I'm managing so far.

In the first month two separate people I knew through my work previously came in and tried to give me advice on how to set up an on-paper company, register myself as an employee, and pay myself a minimum wage so that I didn't have to make anything more than the bare minimum of National Insurance contributions.

When I asked the rather obvious question, "Isn't that kind of...tax avoidance? Or evasion?" their replies were, respectively, "Look, I'm only telling you how to do what every other small business and independent trader in the country is doing," and "Yeah, kind of, but National Insurance doesn't really matter anyway".

I kind of hate being an independent businessman already, because this seems to be the prevailing attitude. Everybody offers to pay cash in case it's "easier"; some openly state, "you know, so you don't have to put it through the books". When I explain that I actually put everything through the books, they look at me sympathetically, as though I'm being naive.

Britons are normally incredibly adherent to the law, regarding it (as Orwell observed in Road To Wigan Pier) as a sort of transcendent, unsoilable authority that can be grumbled about but never openly disregarded. But when it comes to small businesses and self-employment, a lot of people I've spoken to don't seem to give a ****: they think it's fine to just cook the books a little bit, here and there.

Is this common/endemic? Or do I just live in a particularly concentrated crock of thieves?

 

It's pretty much standard practice from big business down to man in a van. To quote the phrase beloved of the Tory Party, it's not tax avoidance or evasion, it's merely being tax efficient.

On a more serious note, set yourself up as a company. As a Sole Trader you, as in you as an individual, are liable for any losses or legal action taken against you. It all goes tits up or you get sued (unlikely but you never know) and it's your bank account and your assets on the line.

Setting up a company puts the company and it's assets in the firing line. It is still possible for action to be taken against you directly, but you'd have to do something incredibly stupid or dishonest for that to realistically happen. What you do or don't do regarding your tax situation is up to you, but you should definitely set up a company and work for it just for the legal protection it provides.

 

As far as I'm aware paying yourself minimum and then pulling dividends at a reduced tax rate is standard affair.

Tax evasion and avoidance are two different things by the way.

I'm sure the tax man won't have any problems if you want to pay more tax.

 

That's just the way it is.

 

There's a timely piece on the beeb about Facebook paying $6,643 in corp tax last year, despite posting $2.9bn profit.

 

This is certainly the standard practice. To be honest, the Inland Revenue could not be more aware that this is how almost everyone runs things. There isn't anything illegal about it and it certainly doesn't class as evasion. Tax minimisation is probably the term I would use. HMRC could pretty easily put up a few rules to block this behaviour if they really cared. IR35 was introduced to help this.

 

Cooking the books is the result of operating within a system which demands you make a profit from people in order for you to make a living. If you also pay 60-70% in tax on your labor it becomes understandable. Often times both contractor and client stand to gain from the arrangement.

Morally speaking I find it difficult to object since making profits from people by extension is a form of theft and therefore morally reprehensible. We all operate in this system and have to make the best of it, so for me it's just difficult to judge those who cook their books. I suppose I'm a bit of a maverick.

 

Like pretty much everyone else, I pay as little tax as I can legally get away with. But my main advice would be similar to Gareth's - claim *all* the things! [HMRC even list all the things you can claim for]

So in Gareth's case - consumables [toner and batteries etc.], hosting costs for his website, and even a portion of his utility bills and council tax [as IIRC he works from home] would all go down as expenses...


One thing i will point out from experience [parents' rather than mine], HMRC get suspicious if you constantly [claim to] lose money, you need to at least look like you're trying to make a profit.

 

I'm no expert but I think the idea is you pay yourself a low wage (which you can live on) and then at the end of the year you pay yourself a dividend (as shareholder) which is only taxed at 10%.

Or something similar.

 

I can confirm that it is fine. My sister is a qualified accountant (and a director of the firm) who manages my dads company books. Paying out the minimum wage and then taking the remainder as a dividend is absolutely fine and perfectly legal. Pay zero tax and pay 10% on your dividend payout. He's still paying NIS as he is the managing director, I believe. I'm not sure on the whole ordeal, but I know it is legal.

 

Be aware that HMRC are on the case with low salary and large dividend payements.
My bookkeeper says that is what a lot of people do, and HMRC will be taxing dividends >£5K from next year IIRC.

 

there are loads of allowances in place. you can sculpt your income, just pay yourself the tax free basic and get the rest in dividends which are capped to 20%, so you dont pay higher rate of tax.

There are of course loads and loads of things you buy for business use that you can reclaim as a business expense which an employee normally would not be allowed to reclaim by his/her employer.

There are a few allowances here and there. For instance, i tend to travel for my business every now and again. I claim very generous mileage and always treat myself to a nice lunch which is full deducatable expense AND VAT reclaimable.

 

that's a shame

 

Don't worry - it's the HRMC so will probably take years to sort out.

 

I had a meeting with my accountant last week, and was advised that all dividends from next year will be taxed starting at 7.5%

Like most that have commented already, I also only pay myself the minimum and make the wages up with dividend payments. Although I'm under a Ltd company not as a sole trader. We claim absolutely everything we can back!

 

Thank you all very much for the input and info! It's been difficult getting a broader cross-section on this sort of thing.

For my part, I have personal reasons for paying as much tax as my position might imply - my dad's on disability living allowance and depends heavily on benefits and the NHS, which I've been told are supported by income tax and are squeezed by peoples' efforts not to pay it. My contribution or lack thereof is a drop in the ocean, I know, but if a point of principle makes you feel better about yourself, may as well stick to it, I figure. (I'm also generally pretty socialist at base and feel that a lot of our problems as a country stem from inefficient or outright dysfunctional wealth redistribution mechanisms.)

 

At the end of it all, one small business owner with a low wage and decent dividends can mean quite few taxable employees. So there's method to the loop holes to encourage potential business owners to start up. What really irks me is the large corporations. But I guess its the same deal right. One large corporation not paying taxes means many, many employees that do. It does annoy me that the employees bear that tax burden of the employer.

 

The new dividend rates are hardly a big deal: http://www.itcontracting.com/new-dividend-tax-april-2016/

These figures don't worry me at all. I thought it was going to be more serious, but for people in the 30-50k range, it's water under the bridge.