Tax Saving Strategies

• Getting the timing right

Expenses

Expenditure incurred before the company year end might reduce the current year's tax liability instead of next year's. Bringing forward expenditure by even a few weeks on, for example, building repairs, advertising, sales and marketing campaigns, and any other item deductible from profits can accelerate the tax relief by twelve months.

Plant and equipment

Investment in plant and equipment (but not cars) attracts an allowance of up to 100% of the cost, up to £50,000. The new annual investment allowance commenced on 1 April 2008 for companies, and 6 April 2008 for other businesses. The allowance of £50,000 relates to a full 12 month period, and is reduced proportionately for short accounting periods, and where the accounting period spans the commencement date. The allowance is only available once for a group of companies, but where companies are under common control of one or more individuals, multiple allowances will be available unless the companies also occupy the same premises or carry on the same type of business. The allowance is not available to partnerships with limited company members.

If the expenditure on plant and equipment exceeds the annual investment allowance, the balance of cost attracts a writing down allowance of either 20% per annum or 10% per annum, based on the written down value of the equipment. This allowance is available in the first year of ownership, so businesses will claim more than £50,000 of allowances on new spend in excess of that amount. The lower rate of allowances applies to assets with an expected useful life of more than 25 years, and to integral features in buildings such as lighting and power supply.

Spending money on energy efficient technology and water saving technology (including very low emission newly registered cars) attracts a 100% allowance, over and above the annual investment allowance. Companies which spend significant sums on energy efficient or water saving technologies (but not cars) so that they incur tax losses can also surrender that loss for a tax credit payment of up to 19% of the loss. The payable tax credit arrangements are currently subject to EU approval.

Hire purchase and lease purchase

Hire purchase and lease purchase may provide a useful method of financing the purchase of an asset. Plant and equipment purchased on hire purchase will qualify for writing down allowance on the full purchase price, even if the company has paid only the deposit.

Industrial buildings

Expenditure on new industrial buildings qualifies for writing down allowance of 3% on cost. Used industrial buildings may also qualify for an allowance, dependent upon allowances available to previous owners.

Industrial buildings allowance is to be phased out by 2010/11.

Provisions

Specific provisions against bad debts or stock are allowable for tax purposes, but general provisions are not.

Bonuses to directors and staff

A proper provision may be made in the annual accounts for specific bonuses paid up to nine months after the year end. Take care to ensure that these are charged to PAYE and NI as appropriate.

Capital gains

Capital gains are taxed at the effective rate of corporation tax. Gains are calculated after deducting from the sale proceeds the market value at March 1982 (or cost of acquisition, if later), costs incurred in improving the asset, an indexation allowance, and certain disposal costs.

Reducing capital gains

Rollover relief

Claim rollover relief if your company buys new chargeable business assets within one year before or three years after selling a business asset. This effectively postpones any tax liability until the new asset is sold. Special rules apply if the new asset is a wasting asset.

Negligible value claim

Claim relief on assets that have become worthless. A loss can be claimed even though the asset has not been sold, and this can then be offset against chargeable gains.

Getting the timing right

The timing of certain payments and receipts of income is crucial for tax purposes. By moving a date of payment or receipt by just a few days either side of the company’s year end, you can reduce the tax bill and defer payment until the next tax year.

Do

• Ensure that charges on income (for example, annuities and royalties) are paid before the year end
• Ensure that any provisions made are against specific costs, not a general estimate
• Ensure that any pension contributions are paid before the year end
• Consider whether any additional remuneration/bonuses should be voted to directors in respect of the current accounting period (these can be paid up to nine months after the year end)
• Ensure that you value stock and work in progress taking into account any reduction arising as a result of obsolescence.
• Plan to bring forward any capital expenditure into the current accounting period

Don’t

• Sell assets, such as property or shares, that will give rise to a large chargeable gain until after the company's year end
• Forget the effect this will have on your accounts as if you reduce your profits, the bank manager may wonder if that lending was such a good idea after all!
• Sell assets on which capital allowances have been claimed until after the year end

Do call us if you would like further help or advice on this subject.