Joe Brough looks at some tax planning opportunities for companies, with the end of the current financial year looming for corporation tax purposes.
This article briefly highlights some tax planning opportunities available to limited companies ahead of their year end to reduce tax liabilities and maximise profit extraction by the effective use of allowances and reliefs.
Capital allowances
When a company incurs capital expenditure for their business, capital allowances can be claimed, which will reduce the company’s taxable profits.
Capital allowances are available at various rates depending on the type of expenditure incurred. To ensure the most tax-efficient use of allowances, businesses will need to analyse the costs between the various categories.
The main categories of allowances are:
-
Annual investment allowance (AIA) – maximum of £1m of qualifying expenditure*;
-
100% first-year allowance (FYA) on brand new main pool expenditure and electric cars;
-
50% FYA on brand new special rate pool expenditure;
-
18% writing down allowance (WDA) on the general pool*;
-
6% WDA on the special pool*;
-
3% straight line allowance on qualifying structures and buildings*;
-
Small pool write-off where the balance is less than £1,000*.
*Pro-rated for chargeable accounting periods of less than twelve months.
The maximum AIA allowance is restricted to £1m per year, which is split between a company and any associated companies. Companies are associated with each other where one company controls another, or both are under the control of the same person or persons. Where applicable, the AIA can be allocated between associated companies in any way, as long as the overall maximum is not exceeded.
Where the maximum AIA is exceeded and expenditure has been incurred on both general and special rate pool assets, in most cases, the AIA should be allocated to special rate pool expenditure in priority to the general pool. There is no restriction on FYA claims, which should be considered in addition to the AIA, particularly where the AIA allowance has been exceeded, in order to maximise claims.
For allowances to be claimed, expenditure must have been incurred before the end of the accounting period. The date on which expenditure is incurred is the date the obligation to pay becomes unconditional, which in most cases is on delivery.
Where the requirement to pay falls more than four months after the date the obligation to pay becomes unconditional, capital allowances cannot be claimed until the year in which payment is made. For assets financed by hire purchases, this rule does not apply, but the asset must have been brought into use by the end of the period in order to claim allowances.
Pension contributions
When a company makes a pension contribution on behalf of its employees, subject to it satisfying the ‘wholly and exclusively’ conditions, it will be tax deductible. As an added benefit, company pension contributions are a tax-exempt benefit-in-kind for the recipient.
As HMRC generally accepts that remuneration paid to a controlling director will satisfy the ‘wholly and exclusively’ tests, pension contributions are an efficient way to extract remuneration from a company whilst simultaneously lowering corporation tax liabilities.
Corporation tax relief for pension contributions are generally available in the accounting period in which the payment is made (although larger pension contributions may be subject to spreading over more than one accounting period in certain circumstances, which are beyond the scope of this article). Therefore, companies must ensure that contributions have physically been made and payment has left the company bank account prior to the period end. An accounting provision for the expenditure would not be sufficient to satisfy this requirement.
Whilst theoretically a company can make contributions and receive tax relief without restriction, individuals do not receive corresponding treatment and are subject to an annual maximum pension input allowance. The annual maximum for individuals is based on a tax year, which may not be the same as the company’s year end, so the timing of contributions will be important.
From 6 April 2023, the annual maximum pension allowance for individuals is £60,000. In addition to this, any unused allowances from the previous three tax years can be utilised as long as the individual was a member of a pension scheme during this period.
In addition to any gross personal contributions and defined benefit scheme growth a recipient may have, company contributions count towards the annual limit. Where the annual allowance is exceeded, an income tax charge will arise on the recipient at their marginal rate of tax. Companies planning large pension contributions ahead of their period end will need to consider this in order to avoid creating additional tax liabilities.
Trivial benefits
Trivial benefits are a tax-efficient way for companies to reward their employees and for owners to extract value from the company. Trivial benefits are tax-deductible for the company and tax-exempt for the employee.
The conditions to be satisfied to meet the exemption are:
-
the benefit is not cash or a cash voucher;
-
the cost of the benefit does not exceed a VAT-inclusive value of £50;
-
the employee is not entitled to the benefit as part of any contractual obligation; and
-
the benefit is not provided in recognition of particular services performed by the employee as part of their employment duties.
An employee can receive an unlimited number of trivial benefits each year. Examples that can be given include vouchers, hampers and birthday gifts.
Where the company providing the benefit is a close company, whilst directors and members of their family or household can receive tax-exempt trivial benefits, the maximum amount that can be received is £300 over the tax year, subject to the usual conditions being satisfied.
Where a member of the director’s family or household is also an employee of the company, they are each entitled to their own £300 allowance.
Bonuses
A company may consider paying its directors and employees a bonus based on its year end results. Where the necessary conditions are met, a company can include a tax-deductible provision for the bonus payments in its accounts (under CTA 2009, s 1288).
Where a bonus is properly evidenced and documented, this allows a company to accelerate the corporation tax relief it receives on the bonuses ahead of when they are paid for PAYE purposes. In normal circumstances, corporation tax relief would be given in the period that the remuneration is paid.
For this treatment to be available, the company must have a constructive obligation to pay the bonus at its year end. This can be evidenced by a board minute prior to the year end, which is then ratified at the AGM, or if a company has a history of paying bonuses, by past practice.
In addition to having a constructive obligation, the company must also actually pay the bonus within nine months of the period end, or if earlier, the date of filing of the corporation tax return. At the time the bonus is paid, PAYE will need to be operated, with the associated tax and National Insurance contributions liabilities paid.
It is important to be cautious that discussions and provision of bonus payments prior to the period end do not trigger an immediate PAYE liability (under ITEPA 2003, s 18). These rules determine when remuneration is treated as paid and when PAYE should be applied.
These rules are stricter for directors than employees. If a bonus is determined before the end of a period of account, this becomes the trigger date for PAYE to be operated. However, this can be avoided if the bonuses are allocated to a ‘pool’ for a later distribution by shareholders at the AGM, but this is an area where caution should be exercised.
Don’t forget…
-
Working from home allowance – Where directors and employees are required to work from home, they can be paid a tax-free flat rate expense of £6 per week which is tax-deductible for the company.
-
Dividend allowance – For the 2024/25 tax year, individuals can receive total tax-free dividends of £500 per year. Dividends can only be paid to shareholders and only if the company has sufficient distributable reserves.
-
Check time limits – Ensure that any claims for reliefs are submitted in time. For example, for companies making a rollover relief claim, the time limit is four years from the end of the accounting period to which the claim relates.
-
Check director salaries – Where directors take a low salary, ensure that the amount declared through the payroll is at least equivalent to the lower earnings level to receive a qualifying year’s credit for state pension entitlement. For 2024/25, the lower earnings limit is £6,396 per year.
Practical tip
Do not wait until after the year end and when the corporation tax payment date is almost due to start considering tax planning. Business owners need to be proactive to ensure their business is as tax-efficient as possible and all available expenses and reliefs have been claimed.
