How to fund your start-up with the tax system

Why do many start-ups fail? It's well known that cash-flow problems can become so serious that many businesses don't survive them. What if you can use the tax system to help you?

If you know where to look, there's quite a lot out there. Paula Tomlinson, director of On The Spot Tax and an Enterprise Nation adviser, explains how to find it.

Get a PAYE income tax refund

If you've set up as a sole trader and paid PAYE (Pay As You Earn) in the previous three years, or even still paying PAYE income tax, your start-up tax loss will generate a tax refund.

This provides you with some valuable cash flow in the first four years of your sole trade. For example, if you make a £10,000 tax loss in the tax year to 5 April 2019 and paid 40% PAYE income tax in the tax year to the previous 5 April, you can claim a £4,000 tax refund in your tax return.

You can increase your tax loss by including a proportion of your home office costs as an expense. This will increase your PAYE income tax refund.

A tax loss might unexpectedly arise if you invest in a lot of equipment for your business. Up to £200,000 of equipment expenditure is tax deductible in the year you incur it. That will either increase your tax loss or even turn a trading profit into a tax loss.

Use VAT annual accounting

With turnover under £1.35 million, annual VAT accounting can be helpful. VAT is paid during the year on account based on estimated figures.

If you are enjoying an increasing turnover, the amounts paid on account will be less than the final calculated VAT and the balancing amount due is paid one month later than usual. These delays in paying the VAT due is a useful cash-flow advantage.

Time your VAT invoices correctly

As long as it doesn't bring forward your normal payment terms, ask your suppliers to invoice you just one day earlier and you can improve your VAT cash flow by three months.

For example, a £10,000 invoice due to be invoiced on 1 April could be invoiced on 31 March, allowing you to offset the £2,000 VAT in the quarter to 31 March rather than the quarter to 30 June.

Similarly, delaying issuing your own invoices by one day has the same effect. Together, this could provide you with interest-free working capital of £4,000 for three months without involving your bank.

Attract external investors by using the Enterprise Investment Schemes

There are plenty of investors with cash looking for a good return from promising start-ups. The investors get to save 50% or 30% income tax, and are unlikely to pay tax on the gains they make.

As a result, limited company start-ups should make sure they're eligible for one of the Enterprise Investment Schemes (SEIS and EIS) to attract as many investors as possible.

Claim a research and development cash payment

If you're a loss-making limited company carrying out research and development (R&D), HMRC will pay you cash even if you've not yet paid them anything.

If you're writing specialist software, developing infrastructure or rebuilding a website, this activity may be eligible for an R&D claim.

Claim rent-a-room relief

It might seem a bit extreme, but it might be a suitable option for some.

If you rent out a room in your home – owned or rented – up to £7,500 is tax-free and so it's all available to you to help fund your start-up.

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Relevant resources

• How to pay Self Assessment tax

• Small business taxes: A guide

• How to pay VAT – a guide for small business owners