Limited Companies
Tax Saving Strategies
- Getting the timing right
Expenses
Expenditure incurred before the company year end might reduce the current year's tax liability instead of next year's. Bringing forward expenditure by even a few weeks on, for example, building repairs, advertising, sales and marketing campaigns, and any other item deductible from profits can accelerate the tax relief by twelve months.
Plant and equipment
Investments in plant and equipment (not usually cars) by small companies (as defined by the Companies Act 1985) attract a first year allowance of 50% (medium-sized 40%). After the first year, relief is given by writing down allowances of 25% on the tax written down value. For large companies there is no first year allowance - relief is restricted to the 25% writing down allowance.
Companies that invest in energy-saving technology (including low-emission cars) and water-efficient technologies can claim 100% first year allowances.
Writing down allowances on assets with a working life of twenty-five years or more are limited to 10% for companies spending more than £100,000 a year on such assets.
Where commercially and financially appropriate, capital expenditure should be brought forward to make the earliest use of the available allowances.
Hire purchase and lease purchase
Hire purchase and lease purchase may provide a useful method of financing the purchase of an asset. Plant and equipment purchased on hire purchase will qualify for writing down allowance on the full purchase price, even if the company has paid only the deposit.
Industrial buildings
Expenditure on new industrial buildings qualifies for writing down allowance of 4% on cost. Used industrial buildings may also qualify for an allowance, dependent upon allowances available to previous owners.
Provisions
Specific provisions against bad debts or stock are allowable for tax purposes, but general provisions are not.
Bonuses to directors and staff
A proper provision may be made in the annual accounts for specific bonuses paid up to nine months after the year end. Take care to ensure that these are charged to PAYE and NI as appropriate.
Capital gains
Capital gains are taxed at the effective rate of corporation tax. Gains are calculated after deducting from the sale proceeds the market value at March 1982 (or cost of acquisition, if later), costs incurred in improving the asset, an indexation allowance, and certain disposal costs.
Reducing capital gains
Rollover relief
Claim rollover relief if your company buys new chargeable business assets within one year before or three years after selling a business asset. This effectively postpones any tax liability until the new asset is sold. Special rules apply if the new asset is a wasting asset.
Negligible value claim
Claim relief on assets that have become worthless. A loss can be claimed even though the asset has not been sold, and this can then be offset against chargeable gains.
Getting the timing right
The timing of certain payments and receipts of income is crucial for tax purposes. By moving a date of payment or receipt by just a few days either side of the company’s year end, you can reduce the tax bill and defer payment until the next tax year.
Do
- Ensure that charges on income (for example, annuities and royalties) are paid before the year end
- Ensure that any provisions made are against specific costs, not a general estimate
- Ensure that any pension contributions are paid before the year end
- Consider whether any additional remuneration/bonuses should be voted to directors in respect of the current accounting period (these can be paid up to nine months after the year end)
- Ensure that you value stock and work in progress taking into account any reduction arising as a result of obsolescence.
- Plan to bring forward any capital expenditure into the current accounting period
Don’t
- Sell assets, such as property or shares, that will give rise to a large chargeable gain until after the company's year end
- Forget the effect this will have on your accounts as if you reduce your profits, the bank manager may wonder if that lending was such a good idea after all!
- Sell assets on which capital allowances have been claimed until after the year end
Do call us if you would like further help or advice on this subject.
