In this excerpt from the newly released report ‘Year-End Tax Planning for Businesses’ (2023/24 edition), Sarah Bradford looks at some important tax planning considerations before the end of the fast approaching tax year / accounting period.
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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.
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.
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.
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 claims where beneficial), apply equally to companies.
For qualifying expenditure on new plant and machinery incurred on or after 1 April 2023, companies can benefit from full expensing (see 4.6).
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.
From the financial year 2023, the rate of corporation tax is set at 25% where profits exceed £250,000 and at 19% where profits are £50,000 or less. Where profits fall between £50,000 and £250,000, corporation tax will be charged at 25% and reduced by marginal relief. These limits are reduced where a company has at least one associated company (by dividing the limits by the number of associated companies plus one), and proportionately reduced where the accounting period is less than 12 months.
When considering the timing of receipts and payments, it is necessary to factor in the rate at which corporation tax is payable.
The rate of corporation tax depends on the level of the company’s profits and, when planning when to incur income and expenditure, the rate at which corporation tax is payable should be taken into account. This should form part of your year-end review.
Making best use of company losses
Companies have their own rules when it comes to loss relief. Where a company has suffered losses, it is important that relief for those losses is achieved in an optimal manner.
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 the company does not have to claim all of the capital allowances to which it is entitled, as its capital allowance claims can be tailored. Capital gains and capital losses do not affect the amount of trading loss.
To the extent that the trading 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 a repayment supplement. This may be useful where the company is suffering cash flow difficulties as a result of high inflation and high energy costs.
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.
As with unincorporated businesses, additional relief is available for losses incurred in accounting periods that end in the financial year 2020 and in the financial year 2021. The additional relief allows losses for these periods to be carried back three years rather than the usual one, with losses set against the profits of a later year before an earlier year. The losses that can be carried back under the extended carry back rules are capped at £2m for periods ending in the financial year 2020 and at £2m for periods ending in the financial year 2021. A claim under the extended carry back rules must be made within two years of the end of the accounting period in which the loss arose.
Ensure that losses are used efficiently. Where the loss can be carried back, this will generally be advisable, as it will trigger a repayment of corporation tax, which may be beneficial. To benefit from the extended carry back, ensure that claims are made within the time limit.