With its tax reliefs improving over recent years, Research & Development claims should be given more attention.

For SMEs, when you spend £100 on R&D, your corporation tax is not only reduced by the £100 you've spent, but also by an additional £125, taking the total deduction against your company bill to £225.

If you're paying 20% corporation tax, you've saved additional tax of £25 (£125 @ 20%), taking total tax saved to £45 (£225 @ 20%).

You have probably heard of lots of incentives for those who invest in start up companies. This is where individuals pay money to a company in exchange for shares in that company. The tax system helps subsidise the investor's risk in the new unproven business.

But what about your own sole trader business?

It might be small scale and, as there are no shares, it's probably just your money. Aren't you taking a risk? Where are the incentives for you? After all, you might have a good idea which in the future trades from a limited company.

With SMEs having to be more creative as to how to fund their companies, it's become more likely that you may fall on the wrong side of a tax rule.

The traditional method of a company borrowing the money direct from a bank is a no-go area for many SMEs. Even when a loan is granted, it comes with a fee, a high interest rate and you have to provide a personal guarantee against your assets, even the family home.
With tighter cash flow in the recession there is a greater need for working capital, so the funds may not even be for expansion, but merely to enable the company to continue trading.
Consequently, SMEs have been forced to look elsewhere. You may find it costs less to borrow the money personally or, at the very least, it's easier. If you have to provide security you're no worse off if your company had borrowed the money.
If you take out a personal loan and lend those funds to your company, it works very well. You charge your company an interest rate, probably the same or a bit more than the amount you're paying. Your company saves 20% corporation tax, you would get taxed on the amount it pays you, but you claim tax relief because you've lent money to your company. The net tax on you is £Nil and your company receives a 20% tax saving.

What if you take out or use an existing personal overdraft or credit card? It's tempting as it's easy and flexible. However, the rules are different and this has been confirmed in a recent tax case.

This probably stems from the more administration required when running a company. It seems to be assumed that this additional administration includes VAT registration. VAT registration is only required when your annual turnover reaches £73,000.

However, many businesses choose to be VAT registered. This can be a sole trader, partnership or limited company business. The reasons to choose to be VAT registered include benefiting from the HMRC flat rate scheme or being eligible for VAT repayments.

This myth may also come from the fact that businesses with low turnovers are less likely to be run as a limited company. This is because the additional costs such as accountants fees may outweigh the financial benefits of a limited company such as tax savings.