As a business owner, it is important to carry out an annual review of your company’s tax position due to ever-changing tax legislation and commercial factors. Pre-year-end tax planning is crucial as it allows for enough time to carry out any necessary actions. In this guide, we outline some areas where advance planning can produce tax savings.
Corporation Tax
Advance planning for expenditure incurred before the company’s accounts year-end can reduce the current year’s tax liability. Bringing forward certain types of expenditure by a few weeks can advance related tax relief by a full 12 months. Examples of such expenditures include building repairs, advertising, marketing campaigns, redundancy and closure costs. It is important to note that payments into company pension schemes are only allowable for tax purposes when they are actually made.
Capital Allowances
Consideration should be given to the timing of capital expenditure to obtain the optimum reliefs on which capital allowances are available. Single companies can claim an Annual Investment Allowance (AIA) which provides 100% relief on expenditure on plant and machinery, while groups of companies have to share the allowance. There are also 100% allowances on designated energy-saving technologies, and a Super Deduction tax relief has been introduced to increase relief for expenditure on certain items of qualifying plant and machinery.
Trading Losses
Companies incurring trading losses have three main options to consider in utilizing these losses. They can be set against total profits of the same accounting period, carried back against total profits of the previous 12 months, or carried forward against future trade profits only. However, there is a restriction on the use of carry forward losses where a company’s or group’s profits are above £5 million.
Extracting Profits
Directors/shareholders of family companies may wish to consider extracting profits in the form of dividends rather than increased salaries or bonus payments. Opting for dividends instead of increased salaries or bonus payments can result in significant reductions in national insurance contributions (NICs).
Dividends
While the timing of payment may not be crucial from the company’s perspective, it can be a significant factor for individual shareholders. A dividend payment in excess of the Dividend Allowance, which is delayed until after the tax year ending on 5th April, may give the shareholder an extra year to pay any further tax due.
Share Transfers
t is sensible for married couples and civil partners to consider equalizing their income by gifting some or all of any income-producing assets, such as shares they own, to their spouse to save tax. Before doing this, legal and practical considerations need to be taken into account.
Loans to Directors and Shareholders
If a ‘close’ company makes a loan to a shareholder, this can give rise to a tax liability for the company. A loan to a director may also give rise to a tax liability for the director on the benefit of a loan provided at less than the market rate of interest.
Rates of Tax
UK trading companies currently pay corporation tax at the rate of 19% on their taxable profits. For the financial year commencing 1st April 2023, the main corporation tax rate is set to increase to 25% where profits exceed £250,000. A ‘small profits rate’ for corporation tax at 19% will be implemented for companies with profits of £50,000 or below.
Corporation Tax Self-Assessment
Under the self-assessment regime, most companies must pay their tax liabilities nine months and one day after the year-end. If a company’s profits for an accounting period are at an annual rate of more than £1.5 million, they must normally pay their corporation tax for that period electronically and in instalments.
Capital Gains
Companies are chargeable to corporation tax on their capital gains less allowable capital losses. An indexation allowance is given to counteract he effects of inflation inherent in the calculation of a capital gain, but the allowance is frozen at December 2017 for disposals on or after 1st January 2018. Planning of disposals is crucial, and consideration should be given to the timing of any chargeable disposals to ensure advantage is taken where possible of minimizing the tax liability at the rate applicable for small profits, as opposed to the standard rate. It may be possible to avoid a capital gain being charged to tax if the sale proceeds are reinvested in a replacement asset.
Research and Development Tax Credits
Research and Development (R&D) reliefs support companies that work on innovative projects in science and technology. The relief for small or medium-sized businesses (SMEs) is currently 230%, meaning that for every £1 of qualifying expenditure a company makes, it receives an additional £1.30 of relief. Every £1 spent yields a deduction of £2.30 against taxable profits. Companies that incur losses can apply for a tax credit that can be repaid, which is calculated at a rate of 14.5%.
How Southside Accountants Wimbledon Can Help
Professional advice is crucial to achieving tax savings. At Southside Accountants Wimbledon, we provide tailored plans to suit your specific circumstances. We can assist you with pre-year-end tax planning, corporation tax, capital allowances, trading losses, extracting profits, dividends, share transfers, loans to directors and shareholders, rates of tax, corporation tax self-assessment, capital gains, and research and development tax credits. Contact us today for professional advice on how to reduce your tax liability and improve your company’s financial position.
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