As a company director, you will naturally be keen on saving on your corporation tax bill. It might be tempting to simply hand over your end of year accounts to your accountant and hope for the best, but a pre year-end evaluation of your company’s likely taxable profits will be of huge benefit. Such an approach can identify areas of potential tax savings. Naturally, you will not be able to predict your exact profits before the year end, but you should be able to make a reasonable estimate based on past results and trends. So, what kinds of tax savings options for companies are available ?
Loans to directors
This is an area that is typically over-looked by company directors.
A previous blog explained the directors’ loan accounts and their potentially horrendous effects on the corporation tax bill. If your company pays for items on the directors’ behalf, transfers money to the directors’ bank accounts or holds company money in bank accounts that are not in the limited company’s name, it is well worth finding out what the directors’ loan accounts amount to so that they can be dealt with before they become a problem. Bear in mind that any director’s loan account that is still overdrawn more than 9 months after the year end (that is, the director owes the company money) will attract a whopping 25% corporation tax bill on the outstanding balance.
Generally speaking, for every £100 tax deductible expenditure a company makes, it will save £20 in corporation tax, based on the corporation tax rate of 20%. (This rate applies to all companies from 1 April 2015.) It doesn’t make sense to spend money for the simple goal of saving on tax, but if you’re facing a large tax bill and are planning certain expenditures, doing so before the year end will lower your tax bill. You might be contemplating buying new assets (like company vans) or overhauling your existing assets: see the section on capital allowances below. Your financial adviser can also suggest pensions for your company to contribute towards on your behalf.
Bear in mind that increasing your stock (that will be sold by the company) will not save on your tax bill: an accounting adjustment means that the cost of stock in hand at the year end is not deductible for tax purposes.
Tax relief on the acquisition of assets (expensive items that you will use in your trade) works differently than for everyday expenditure. Companies do not receive an automatic 100% tax relief: for some expenditure, such as buying buildings, there is no immediate tax relief at all.
General tools of the trade, vans and equipment for your company falls under a category of capital expenditure called “plant and machinery”. An “annual investment allowance” determines how much, each year, you can spend on plant and machinery and obtain 100% tax relief. Anything spent beyond this allowance receives tax relief spread over several years by means of “writing down allowances”. Currently, the annual investment allowance is £500,000 per annum, but this is dropping to £25,000 from 1 January 2016. If you intend to spend more than £25,000 on plant and machinery, it is clearly worth doing so before 31 December 2015.
Tax relief on cars, which do not count as plant and machinery, is low unless the car is counted as low CO2 emissions for tax purposes. As from April 2015, the car’s emissions must be 75g/km or less to qualify for 100% tax relief. Cars usually attract P11D benefits that can be costly tax-wise for both the company and the car’s user.
You may have brought forward tax losses, which will be offset against your profits in the current year. Alternately, you may be expecting to make a loss in the current year that you can offset against the previous year’s profits and obtain a corporation tax refund.
If your company is in a group, losses one of the companies makes can be offset against the profits another company makes within that group.
If you anticipate a loss and the company has assets that the directors are contemplating selling, it could be helpful to sell the assets and offset the profit on their sale against the trading loss. Bear in mind that when companies sell capital assets, they get the benefit of “indexation allowance” which increases the costs of the assets by inflation to an approximate present day value. This serves to decrease the capital gain if there is one.
Business rollover relief
When you sell certain, substantial assets of your business, if you then re-invest the money into business assets within four years, you don’t pay the capital gains tax on the sale of the old assets till you’ve sold the new assets. The list of assets this rollover relief is restricted to is as follows:-
- interests in buildings or parts of buildings;
- interests in land;
- fixed plant and machinery;
- milk, potato or ewe and sucker cow premium quotas;
- fish quotas;
- payment entitlements under the single payment scheme or basic payment scheme;
- Lloyd’s syndicate capacities; and (less likely but still allowable)
- ships, aircraft, hovercraft, satellites, space stations and spacecraft.
A final point regarding the shareholders’ personal tax bills. If a shareholder’s earnings – including dividends from the company – are below the basic rate tax threshold then no extra tax is payable on the dividend income. The basic rate tax band is currently £42,385 per year, assuming a standard personal allowance of £10,600 per year. If the dividends received push the shareholder in higher rate tax, they would pay an extra 25% tax. If the shareholders are happy to disclose the information to the company directors, it is well worth considering the amount and timing of dividend payments so as to avoid unnecessarily creating a personal tax bill for the shareholders, even if it means just delaying it by a year.
This blog post covers a number of complex areas of tax law. What is best for your company depends a great deal on the particular circumstances. Southside Accountants in Wimbledon would be happy to advise you further on how to ensure your tax bill is minimised.