Due to the ever changing tax legislation and commercial factors affecting your company, it is advisable to carry out an annual review of your company's tax position.
Pre-year end tax planning is important as the current year's results can normally be predicted with some accuracy and time still exists to carry out any appropriate action.
We outline below some of the areas where advance planning may produce tax savings.
For further advice please do not hesitate to contact us.
Corporation Tax
Advancing expenditure
Expenditure incurred before the company's accounts year end may reduce the current year's tax liability.
In situations where expenditure is planned for early in the next accounting year the decision to bring forward this expenditure by just a few weeks can advance the related tax relief by a full 12 months.
Examples of the type of expenditure to consider bringing forward include:
• building repairs and redecorating
• advertising and marketing campaigns
• redundancy and closure costs.
Note that payments into company pension schemes are only allowable for tax purposes when the payments are actually made as opposed to when they are charged in the company's accounts.
Capital allowances
Consideration should also be given to bringing forward capital expenditure on which capital allowances are available.
Generally an annual allowance of 25% is given for expenditure on plant and machinery. Small and medium sized businesses (as defined by company law) qualify for higher first year allowances in the year of expenditure at 40%. For a period of two years, and for small companies only, the rate of first year allowance is 50% from 1 April 2006. Expenditure on designated energy-saving technologies and products qualifies for 100% allowances. Details can be found on a web site - www.eca.gov.uk
Allowances are also available for investments in certain types of building.
The government has announced that they propose to significantly change the system of capital allowances from 2008/09 onwards.
Trading losses
Companies incurring tax losses have three main options to consider in utilising these losses:
• they can be set against any other income (for example bank interest)
or capital gains arising in the current year
• they can be carried back for up to one year and set against total profits
• they can be carried forward and set against trading profits arising in future years.
Extracting profits
Directors/shareholders of family companies may wish to consider extracting profits in the form of dividends rather than as increased salaries or bonus payments.
This can lead to substantial savings in national insurance contributions.
Note however that company profits extracted as a dividend remain chargeable to corporation tax at a minimum of 20% from 1 April 2007.
Dividends
From the company’s point of view timing of payment is not critical, but from the individual shareholder’s perspective, timing can be an important issue. If the shareholder is a higher rate taxpayer, a dividend payment which is delayed until after the tax year ending on 5 April may give the shareholder an extra year to pay any further tax due.
The deferral of tax liabilities on the shareholder will be dependent on a number of factors. Please contact us for detailed advice.
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