Corporation tax planning

Tax is a major cost to profitable companies. It pays to take a little time thinking about how to keep that tax ‘hit’ to a minimum

All companies (I suppose there are bound to be some bizarre exceptions) aim to ┬áearn profits, and in planning for this it would not make much sense to disregard what can be one of the major costs – tax, in all its forms.

When looking to make major business decisions – perhaps when buying a business, investing in a major new asset, or thinking about selling up – most directors will seek guidance on tax issues.

But all transactions have tax consequences and it pays to think about how to keep tax to a minimum not just on special occasions but as a matter of routine.

For most owner-managed businesses the most practical way of achieving this is to have a pre-year end review to search out opportunities to save tax, to defer it or even to bring it forward if that will result in profits being charged at a lower tax rate.

A pre-requisite for a full planning exercise is a set of up-to-date and reliable management accounts, ideally with financial projections indicating the likely trend of future trading and proposed purchases or sales of fixed assets (vehicles, properties, plant & equipment and so on).

But even where this information is not available or complete (and why isn’t it?) a review can still generate valuable benefits.

Any actions proposed will have to follow the usual tax planning principles – which in essence amount to recognising that it is not sensible to take any action to save tax that may have adverse commercial consequences.

Each business will be different in its tax planning needs, and as circumstances change the approach will vary too. But any review is likely to consider the issues below…

Deferring income or profits

It is often worthwhile delaying a transaction to shift profits forward into the following financial year. If a profitable sale can be delayed from the last month of one year to the first month of the next, any corporation tax charge on it will be payable one year later.

And delaying a profit can also result in it being charged at a lower rate of tax – not only because tax rates may be falling but also in cases where companies are caught by the steep tax charges that apply when their profits place them between the large and small company corporation tax rates.

Among ways that may be considered to defer income are not only pushing sales forward into the following accounts period but perhaps selling goods on consignment or, if a business is in a seasonal trade, changing its year end to exclude a more profitable period or to include a loss making one.

Bringing forward costs

The obvious follow up to deferring income is to bring forward expenses that will reduce profits. Areas to address would be those such as:

– making pension fund contributions;

– bringing forward bonus payments to staff or directors;

– making specific provisions against bad debts, slow moving stocks or for redundancy payments etc;

– accelerating ‘discretionary’ expenditure such as building maintenance or decorating, an advertising campaign or making qualifying charitable donations;

– starting a new business that will be loss making in its early years.

Capital allowances

These are the special rules that apply to the tax treatment of purchases and sales of fixed assets. It will always be worthwhile to consider bringing forward the purchase of new, allowance generating assets or to sell a property that is to generate a loss.

There are a wide range of allowances and regulations surrounding specific situations and asset types, and individual advice on this area is essential.

Other areas

There are other matters that should be looked at too:

– the best use of trading losses;

– the special circumstances surrounding property income;

– investment in green technology, energy saving or water efficient equipment etc;

– capital gains matters;

– tax efficient investments including EIS & VCT schemes

– group tax planning issues within groups of companies including reorganisations, mergers & demergers;

– making the best use of the small companies rate;

– VAT planning;

– most importantly, a review of claims deadlines.

Help is at hand!

If you would like to talk to us about arranging for a company tax planning review, please contact Bernice Constantine.

Riley Chartered Accountants
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