Company Pre and Post Year-End Planning Notes
As your company approaches its year-end, you should bear in mind that the profit declared in the final accounts will be liable to Corporation Tax (currently at a rate of 19%) payable 9 months after the end of the year. There are certain items that you should perhaps consider before the accounting year ends;
1 – Do you have current management accounts (possible for up to 9 or 10 months) from which you can project your likely level of profit for the whole year? This will provide an indication of the likely level of the company’s eventual Corporation Tax liability. With this figure in mind you can then consider the options available to you to mitigate some of this tax.
2 – Are there any earlier years trading losses available to offset?
3 – If your profits exceed £1.5m then for the following year you will need to consider making payments on account starting during the course of the accounting year.
4 – Although paying Corporation Tax may not appear to be to your advantage, retaining profits within a company and suffering 19% may be advantageous, rather than extracting profits by way of additional remuneration and thereby suffering higher rates of personal Income Tax and National Insurance.
Extracting profit by dividends will not reduce the company’s Corporation Tax bill and the dividends will be liable to additional personal dividend tax (7.5% for basic rate taxpayers, 32.5% for 40% taxpayers and over 38% for 45% taxpayers).
Therefore suffering Corporation Tax is not always going to be the negative option.
Looking longer term, you do need to bear in mind that retaining excess amounts of profit within a company can endanger the company’s trading status, which would in turn endanger any Capital Gains Tax Entrepreneurs Relief, on the eventual disposal or winding up of the company.
5 – Consideration should be given to deferring income to a later year, although not saving tax, will have a cash flow advantage, as any Corporation Tax on the profit deferred will be payable a year later.
There are a number of options to be considered for reducing/deferring profit;
- Income should be reflected for tax purposes in accordance with generally accepted accounting principles (GAAP). The general principle is that income arises when the work is done or the goods are supplied and not when you are paid. It may therefore be possible for income to be deferred into a later accounting period, however, any accounting policy used must be applied on a consistent basis from one year to the next. This is an issue that we will need to discuss with you during the course of our accounts preparation work.
- There are a number of ways that you can maximise the deduction for expenses, again any deductions must be applied consistently and be in accordance with GAAP.
The debtors’ ledger should be reviewed in detail so that provisions and/or impairments can be made for bad debtors. It is important that evidence is available where a provision is to be made, that the circumstances under which the debt have proven to be bad were in existence as at the balance sheet date.
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.
It might be possible to make a provision for bonuses and/or other remuneration to be paid in the following year, thus advancing tax relief. For such a provision to be allowable, it must be possible to establish that the liability to make the payment existed at the balance sheet date and that the payments 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.
If the company has a registered occupational pension scheme (including schemes such as a SIPP or a SASS for the directors and their families), tax relief is given for contributions actually paid in the year, rather than the amounts provided for in the accounts
Research and Development Tax Relief
Companies carrying out qualifying research and development (R&D) activities can save Corporation Tax, depending on the costs incurred. Only companies can claim this relief – sole traders and partnerships cannot. Generally speaking, the relief is under claimed and it is important to identify any potential R&D projects. Read in more detail on page 19 of HMRC guidance notes at http://www.hmrc.gov.uk/gds/cird/attachments/rdsimpleguide.pdf
Maximising Tax Relief for Capital Expenditure
Before the end of your accounting period, you should seek to make use of the Annual Investment Allowance (AIA) and other Capital Allowances. You may decide to bring forward capital expenditure, particularly where the AIA will be exceeded in the following accounting period. Remember there are rules dictating when Capital Allowances can be claimed, for example, the requirement for the asset to belong to the company and in respect of extended payment terms. Announced in the 2018 Budget, the Government has significantly increased the AIA to £1m from 1 January 2019. They have also introduced a new Structures and Buildings Allowance at 2% per annum for new commercial buildings acquired on or after 29 October 2018. Both of these need to be factored into your planning.
The items in BLUE above require action before the end of the accounting year. The other items can be considered during the course of the accounts preparation.
Please do contact us if you require further clarification.