As the end of the tax year or the accounting period approaches, it is a good time for businesses to take stock and review their affairs. No-one likes to pay tax unnecessarily, and a little time spent considering the tax position ahead of the year-end can realise considerable tax savings. Now is the time to ask questions which can help to dramatically reduce your tax bill.
The following is an excerpt from our newly released tax report Year-End Tax Planning For Businesses
Family And Personal Companies
Introduction To Year-End Tax Planning For Family And Personal Companies
Operating via a limited company can be tax-efficient and has the added benefit of limited liability. However, the compliance burden is much greater than for a sole trader or unincorporated business.
Family and Personal Companies are popular structures and provide their own year-end planning opportunities. While a limited company is a separate legal entity from the shareholders who own it, paying corporation tax on its profits, in a family or personal company situation, the company cannot be considered in isolation – action taken to reduce the corporation tax liability of the company may trigger a tax bill for a shareholder or an employee. It is necessary to consider the whole picture.
Where a company realises a chargeable gain, this is chargeable to corporation tax. Companies have no annual exempt amount – the gain (less any allowable losses) is taxable in full.
For example, paying a bonus to a director will reduce the company’s taxable profits as the bonus and associated employer’s National Insurance are deductible; the director may pay 40 or 45% tax on the bonus, as well as employee’s National Insurance, outweighing the corporation tax saving by the company.
This section looks at some general tax planning tips relevant to personal and family companies and their directors and shareholders.
Minimising The Company’s Taxable Profits
A limited company does not have the option of using the cash basis; consequently, profits must be computed using the traditional accruals basis.
In seeking to minimise the taxable profits of the company, the points noted in section 2 above (to the extent that they apply under the accruals basis), as regards ensuring that deductions are claimed for all allowable expenses and that relief is claimed for capital expenditure via the capital allowances system (tailoring claiming claims where beneficial), apply equally to companies. The timing of expenditure and receipts – accelerating or deferring income or expenditure - can have an impact on the time at which tax is payable and the rate at which relief is obtained. The rate of corporation tax is 19% for the financial years 2018 and 2019, reducing to 17% for the financial year 2020. As a general rule, the aim is for income to be taxed at the lowest rate and as late as possible and expenses to be relieved at the highest rate as soon as possible.
Review the Tips in Section 2 as applicable to minimise the company’s taxable profits.
Making Best Use Of Company Losses
Companies have their own rules when it comes to loss relief.
Where a company has a trading loss for an accounting period, the loss is set against other income (such as interest) and chargeable gains of the same accounting period. Capital allowances and balancing charges are taken into account in computing the trading loss (although, remember capital allowances do not have to be claimed and claims can be tailored), but capital gains and losses are not.
To the extent that the loss is not used against income and gains of the same accounting period, it can be carried back or carried forward.
A loss can be carried back against profits of the previous 12 months. This may generate a repayment of corporation tax already paid, plus repayment supplement.
Where the loss cannot be carried back, for example, if there was a loss in the previous 12 months, the loss can be carried forward and set against future trading profits.
Ensure that losses are used efficiently. Where there are profits in the previous 12 months, carrying the loss back will trigger a repayment of corporation tax, which may be beneficial.
By Sarah Bradford
Get the full report here
This article was first printed in Tax Insider in March 2019.