End Of Year Tax Planning For The Business Owner

As the economy recovers, what is your financial strategy for growth?

Whilst the UK economy continues to recover, the strength of the recovery may be relatively uncertain, especially given the indications of some other economies faltering. Businesses and companies which have a strategy in place to maximise growth will be well placed to benefit from any upward trend in sales and asset values but it continues to be important to maximise any reliefs and claims that are available to companies.

The Government are, however, clear about challenging any tax planning which they deem abusive.

Our year end guide summarises some key tax and financial planning tips which should be considered prior to the end of the tax year on 5 April 2015 or for companies prior to their accounting period end. The planning tips set out in this guide are all statutory reliefs which can be used as Parliament intended to assist businesses and companies to improve cash flow for growth.

Corporation Tax Rates

Corporation tax rates are currently

Main rate = 21%

Small profits rate = 20%

The main rate will drop further from April 2015, aligning the main and small company rates at 20%.

You may think that this alignment of the main and small company tax rates results in the associated company rules being redundant. They are however still applicable in certain circumstances, in particular when determining whether a company should make quarterly payments of its corporation tax liability and also when considering the availability of the £2,000 employment allowance. This is only given once to two or more associated companies.

Income and expenditure

The general tax planning strategy should normally be to defer income and make full use of all available allowances and deductions. The reduction in the main rate of corporation tax from 23% to 21% from 1 April 2014, and then to 20% from 1 April 2015 will increase the value of this strategy.

Income

Income can be deferred in several ways;

 Ensuring that goods or services are sold in a later accounting period.

 Selling goods on consignment or on a sale or return, so that the income need not be recognised until the goods are actually sold.

 Investing surplus funds in investments that give rise to deferred income (outside the loan relationships regime) or capital gains.

 If a company has a second business, the company’s accounting period could perhaps be extended or shortened to maximise the availability of tax relief for loss-making periods. Care must be taken to comply with company law, because there are restrictions on how often a company can change its accounting period, and in any case it cannot be longer than 18 months.

 In some cases a company could consider changing its accounting policies for specialised trading activities, for example, builders with long-term contracts. The current policies might not be the most appropriate way of reporting income for tax purposes. In certain situations, a change in policy can defer income to later periods. However, the accounting policies must be applied on a consistent basis from one year to the next, and this could restrict such tax planning measures.

Expenditure

There are several ways in which a company can maximise deductions for expenses in an accounting period. Planned expenditure, for example on repairs, could be brought forward, or, in some instances, a provision could be made in the accounts for future costs. In general, tax relief is allowed for provisions made in accordance with generally accepted UK accounting practice. The following items merit particular review.

Bad debts

The debtors’ ledger should be reviewed in detail so that provisions and/or impairments can be made for bad debtors.

Stock

The company can make a specific provision against slow-moving, damaged or obsolete stock, but a general provision is not allowed against tax. The company might be able to change the way it values stock, but great care needs to be taken.

Closure / redundancy

To obtain a tax reduction for redundancy costs not yet incurred, redundancy notices should be issued before the end of the accounting period.

Bonuses

It might be possible to bring forward remuneration intended for the following year, thus advancing tax relief.

 Bonuses to directors and staff could be paid before the year end, but the PAYE and National Insurance implications for the company and this, together with effect on the overall tax liability for the individual concerned, must be considered.

 Alternatively, bonuses could be accrued, but they must then be paid within nine months of the end of the period, otherwise they will be deductible only in the accounting period in which they are paid.

Pension contributions 

If the company has a registered occupational pension scheme, tax relief is given for contributions actually paid in the year, rather than the amounts provided for in the accounts.

Action Point

As with all tax advice and specific opportunities, there has to be a balance met between the commercial objectives of the company and any implementation of the issues mentioned above. This should be spoken through with the tax department who specialise in ensuring advice is technically sound and commercially savvy.

Capital Allowances

The 100% Annual Investment Allowance (AIA) increased to £500,000 from April 2014 for a temporary period ending on 31st December 2015 (this increase is time apportioned across your accounts period but care must be taken as the amount of relief depends on the timing of the expenditure). The increase gives companies a time limited incentive to invest in plant and machinery with a benefit of tax relief to offset the cost of investment. It is important to consider investment strategies now as the current intention is for the AIA to reduce back to £25,000 from 1 January 2016.

It may be beneficial, in certain circumstances, for a company to change its accounting period to maximise the AIA available, although as mentioned previously (Income section, point 4) care must be taken to comply with company law.

If you are planning any capital expenditure in the near future, especially on or around the ‘straddling dates’ for AIA, talk to us to see how you can gain the maximum benefit from this relief.

Remember that certain new plant items can qualify for an immediate 100% deduction, in

addition to the AIA available. In general these items need to be included on government lists of approved plant or technology items and they would include:

 Energy efficient plant and equipment and water technology

 Low emission (currently less than 95g/km of CO2) or electronically propelled cars (see Green Cars, below)

 Zero emission goods vehicles

Capital allowances and Buildings

When buying or selling a commercial property, whether for use in your own business or for letting to a third party for use in their business, it is now more important than ever to consider capital allowances in advance of the transaction. All properties will contain items eligible for capital allowances, for example the electrical, plumbing and heating systems, air conditioning and lifts. Especially with the current increased levels of AIA available it is imperative that allowances on such items are maximised. Legislation in this area has changed in recent years and since April 2014 allowances for the purchaser can be lost forever if appropriate steps are not taken prior to the sale/purchase. If planning any such sales or acquisitions, talk to us to ensure that the best tax treatment is obtained.

Action Point

Both for capital allowances generally and purchase/sale of a property, the earlier capital allowance advice is sought, the more planning that can take place to ensure the best treatment is obtained. Especially when dealing with the purchase or sale of a commercial property, advice should be obtained at the onset of any discussions to ensure the new rules are considered.

Provide green company cars

To encourage the use of ‘green’ company cars, there are tax incentives for company cars which produce low amounts of CO₂/km. These incentives allow cars to be provided which can give little or no Benefit in Kind for the employee and give the company a full first year tax deduction for the cost of buying the car.

Many employers will opt for cash alternatives to company cars as an allowance is typically easier to administer. In addition, from 2014/15 the employer will be able to provide loans to employees of us to £10,000 without interest or a Benefit in Kind.

Claim enhanced tax reliefs available only to companies

A company may be able to claim enhanced tax reliefs which give a tax deduction of more than 100% for a range of expenditure which HMRC are seeking to encourage, including;

 Research & Development Tax Relief where relief can be up to 225% (230% from April 2015)

 Creative Sector Tax Reliefs were relief can be up to 200%

 Land Remediation Reliefs where relief can be up to 150% For loss making companies, the losses created by these reliefs can often also be surrendered to HMRC for a cash tax credit.

Research and Development

Companies should review their activities and consider whether any of these undertakings includes elements of Research & Development (R&D). Please talk to us in this regard; the R&D “net” can fall wider than you might think and the reliefs available can be extremely advantageous. Small and medium sized companies (SMEs) are given an enhanced deduction against tax of 225% of the actual eligible costs incurred, with the chance of actual cash refunds in loss making situations. For large companies, the basic tax relief is on 130% of the costs.

 R&D means activities treated as such under normal UK accounting practice – effectively if work is being carried out to overcome scientific or technical uncertainty a claim may well be possible. The eligible expenditure covers staffing costs, consumable stores, certain other costs such as power, fuel, water and software, or sub-contracted work. It must be related to a trade carried on by the company or be expenditure from which it is intended that such a trade will be derived.

 From April 2013, large companies may alternatively claim the R&D relief as a taxable ‘Above the Line’ credit (effectively a grant) at 10% of their eligible costs. Furthermore where companies are loss making, a large part of this can be taken as a cash payment from HMRC. From April 2016 the old system will cease and all large claims will be under this new scheme.

In the Autumn Statement, the Chancellor announced that he intends to increase the tax deduction for R&D expenditure for SME’s from 225% to 230% and increase the Above the line credit for large companies from 10% to 11% from 1 April 2015.

Patent box regime

In addition to R&D tax credits, the Patent Box provisions introduced in 2012 can also currently be utilised to reduce tax following R&D activities that culminate in patented innovations. The Patent Box regime allows qualifying companies to elect to effectively apply a 10% tax rate to all profits attributable to products, processes or royalties that carry or include a qualifying patent.

The rules are being phased in from 2013 with the low 10% tax rate intended to apply from the 2017 Financial Year. Discussions, however, are taking place as the regime is seen internationally as giving UK eligible companies an unfair advantage. It has been agreed that the patent box regime, as currently drafted, will be closed to new applicants from June 2016 and will stop operating from June 2021.

If your company could benefit from the current patent box provisions it is therefore important to act now to secure the relief’s. ‘Patent Box 2’ will replace the Patent Box and although the finer details have not been announced yet, it will likely be only available for R&D that has taken place in the UK. The two schemes will run in parallel with each other until 2021 when the original scheme will end.

Action Point

There are lots of companies who are partaking in R&D but not claiming any relief, simply because they are unaware of what they are doing is R&D. If you are doing anything bespoke, please come to speak to one of our R&D specialists who will usually be able to give you a quick answer if it is worth pursuing or not!

Auto enrolment

New workplace pension regulations came into force in October 2012, heralding the most significant changes to the pension sector in many years.

There are still a lot of employers who do not think that the new pension rules apply to them. However, whether you operate as a limited company, partnership or sole trader, if you have one or more employees then you will have to comply with the new regulations.

Failure to do so will mean financial penalties, and persistent offenders can be fined on a daily basis for ignoring the new regulations.

You will be required to establish a qualifying pension arrangement with effect from your ‘staging date’ and automatically enrol eligible employees.

Have you received notification of when your auto enrolment staging date is for the new pension legislation? Have you had any discussions about this to date?

Let us know when your staging date is and how many employees you have, and we can start to help with planning your pension scheme, in terms of set up and managing the extra costs involved.

Our Wealth Management teams have already been talking to clients, at no cost, to make sure that they are aware of the options. The feedback tells us that 12 months prior to the staging date is the right time to plan the process and to start to put plans into motion, because at the moment pension providers won’t look at anything with less than 6 months to the staging date.