Year end tax planning
Written by Ray Coman
Profits can be increased by minimising tax throughout the year. However, special opportunities for saving tax are presented leading up to and following on from the year end. This results from the way that tax is calculated based on profits for the year, or the period, just passed.
A tax deductible purchase just before the year end will be relieved about a year earlier than one made shortly after the year end. In many cases there is a cash flow advantage to investing just before the year end, as the tax bill falling soonest will be lower. However this will not always be the case. If the business has made a loss, or has a loss unused from an earlier year, the tax liability for the year will be nil regardless of extra expenses made. Therefore, cash can be saved for longer by delaying purchases and without any downside tax implications. Thought should also be given to tax rates. Where tax rates are dropping, the effective tax savings will be higher by making a purchase in the earlier accounting year. The reverse applies where tax rates are on the rise.
For practical purposes, a business has more flexibility to alter the timing of certain types of expense. For year end tax planning, particular focus should therefore be paid to outgoings such as pensions, repairs, advertising, recruitment and redundancy.
Profits for tax purposes are broadly based on when income is earned and expenses are incurred, regardless of the time the income is received or expenses are paid. As such, to improve cash flow it may be possible obtain tax relief for an expense in one period, but pay for it in future periods. This is often the case with hire purchase arrangements. To prevent abuse of this system, any staff bonuses can only be deducted from taxable profits if paid within nine months of the year end. As a further exception to the rule, pension contributions can only be deducted from profits when paid.
A provision against a specific bad debt or stock write off can be deducted from tax adjusted profits. Stock should be valued before the year end and amounts which are obsolete should be written off for tax purposes. As you could be taxed on the value of any incomplete work at the year end, you should choose an appropriate basis of valuation.
Particular consideration should be given to capital budgeting, since a separate system of capital allowances determines the tax treatment of items such as equipment, computer and vehicle acquisitions. It may, for instance, be beneficial to acquire a large item of equipment in tranches so as to optimise use of the annual investment allowance. In general, a capital allowance is deducted when an item is purchased, however, sometimes it is more dependent on when it is brought into use, for instance if it is owned by a director and transferred into the company.
The tax system is also designed to encourage certain types of expenditure, such as on energy saving technologies which receive 100% capital allowances, and discourage certain other types of expenditure, such as on cars that are not fuel efficient. Costs which are eligible for extra tax relief are often related to specific industries and business activities.
The timing of business decisions is driven by commercial concerns, of which tax is often important. Please arrange to see us before the year end to discuss the options.