Running a business in today’s climate requires constant focus on growth, staffing, and cashflow. Tax compliance is rarely at the top of the priority list until a problem arises. Yet many of the most costly tax issues facing owner-managed businesses are not the result of deliberate avoidance, but of routine decisions made without full awareness of the rules.

Whether you operate a start-up in Bristol, a family business in the South West, or an expanding SME elsewhere in the UK, the same risks frequently emerge. Below are several common tax traps that business owners should be alert to in 2026, together with practical steps to reduce exposure.

1. Dividend Planning and Director Remuneration

For many small companies, paying directors through a combination of salary and dividends remains a common approach. While often tax-efficient, it can create difficulties if handled incorrectly.

Typical issues include paying dividends without sufficient distributable reserves, failing to maintain proper documentation such as dividend vouchers and board minutes, and underestimating the impact of higher dividend tax rates once income thresholds are crossed.

Avoidance strategy: Remuneration planning should be reviewed annually, supported by up-to-date accounts, and dividends should only be declared where profits allow. Good record-keeping remains essential in the event of HMRC scrutiny.

2. VAT Registration and Growth Pressures

VAT is one of the most frequent problem areas for growing businesses. Many owners only realise they have exceeded the registration threshold after the fact, which can result in retrospective VAT liabilities.

Problems often arise where businesses fail to monitor turnover on a rolling twelve-month basis, misunderstand the VAT treatment of mixed income streams, or expand into online and cross-border sales without considering additional complexity.

Avoidance strategy: Businesses approaching the threshold should monitor turnover monthly and plan ahead for the commercial impact of VAT on pricing and invoicing.

3. IR35 and Contractor Engagement Risk

The off-payroll working rules continue to present challenges, particularly in sectors that rely heavily on contractors, including technology, construction, and professional services. Bristol’s strong start-up and consultancy market reflects a wider national reliance on flexible labour, making IR35 compliance an ongoing concern.

Errors frequently occur where businesses assume that the use of a personal service company automatically places an engagement outside IR35, or where contracts do not reflect actual working practices. Many SMEs also lack a consistent status assessment process.

Avoidance strategy: Contractor arrangements should be assessed carefully, documented, and reviewed when roles evolve. Clear internal processes can significantly reduce the risk of future disputes.

4. Director’s Loan Accounts

Director’s loan accounts remain a common source of unexpected tax charges. Informal withdrawals, personal expenses paid through the company, or delayed repayments can all trigger liabilities.

Where loans remain outstanding beyond the statutory deadline, Section 455 charges may apply. In addition, loans above certain thresholds can create benefit-in-kind implications.

Avoidance strategy: Director loan accounts should be reconciled regularly, and personal drawings should be structured through salary or dividends rather than drifting into loan territory.

5. Employment Taxes and Benefits

As businesses scale and begin to recruit, employment tax compliance becomes increasingly important. Errors are common in relation to bonuses, termination payments, reimbursed expenses, and employee benefits.

In competitive markets, employers may offer private medical cover, company vehicles, or equity incentives, all of which carry specific reporting and tax requirements.

Avoidance strategy: Payroll and benefits should be reviewed as headcount grows. Where share schemes or non-standard incentives are introduced, specialist advice is strongly recommended.

6. Property Decisions and Hidden Tax Consequences

Property transactions often carry significant tax implications. Bristol’s commercial property market, like many areas across the UK, has led businesses to explore creative arrangements, from homeworking structures to company-held premises.

However, VAT on commercial property, stamp duty implications, and differing capital gains outcomes depending on ownership structure can all create complexity.

Avoidance strategy: Property decisions should always be assessed not only commercially but also through a tax lens, particularly where long-term investment or exit planning is involved.

Practical Steps for 2026

Most tax difficulties arise gradually rather than through one major event. A small number of proactive measures can reduce risk substantially:

• Monitor turnover regularly, particularly for VAT purposes

• Keep dividend payments supported by clear accounts and documentation

• Reconcile director loan accounts throughout the year

• Implement consistent contractor status procedures

• Review payroll and benefits as staffing increases

• Seek advice before significant property or structural changes

Conclusion

Tax risk is an unavoidable part of running a business, but costly surprises are not. The most common traps affecting business owners in Bristol and across the UK are often preventable with timely planning and appropriate review.

If your business is approaching a growth milestone, changing remuneration structures, engaging contractors, or considering a property move, early professional advice can help ensure compliance and protect long-term value.

If you would like to discuss any of the issues raised above in the context of your business, specialist tax advice at the right stage can make a substantial difference.