Year End Tax Planning for Businesses

What you do before the accounting year end of your business can make a huge difference to how much tax you pay.

Of course, there are all kinds of things you can do after the year end has actually passed, but what I am going to concentrate on, here, is actions you physically should take before that day passes. If you leave them out, it’s mostly too late to do anything about it afterwards. So, for those that read this in November and have a December year end say, there’s probably time to get your act together, and put the taxman on a strict diet, in terms of the slice of the profits “cake” that he takes from your company.

As always, the list that follows isn’t exhaustive, etc, etc.

1. Prudent Stocktaking

Sorry to use that word, much beloved of Gordon Brown, although seemingly not much practised by him, in fact. This really is potentially the single most important item in many sets of accounts, for companies that hold stock.

What I am focusing on here, really, is the chance you have of writing down your stock if it is obsolete or damaged. Don’t do what some rather careless business owners do: which is, pluck a figure out of the air for the total stock value and then deduct say 5% for obsolescence etc. If the taxman can’t see that you have done the thing carefully, on an item by item basis, he’ll throw out the 5% provision.

What’s more, a careful and accurate review of all the stock items may well throw up a considerably greater provision. Remember that, the greater your stock provision, the lower the overall stock value; and the lower the overall stock value, the lower your reported profits for the year.

So, if your stock consists of a relatively large number of items, don’t skimp on the stocktaking procedures: and take as pessimistic a view as you can on the chances of items being saleable or useable. If they aren’t, the accounting practice requires you to write them down to their realisable value.

2. Don’t Ignore the Accounting “Red Tape”

This is a relatively new one, and there’s evidence that a lot of businesses, and even their accountants, haven’t quite caught on to this yet.

The accounting profession, like, I suppose, most professions, isn’t short of its complement of do-gooders. In accountancy they are the people who decide to impose accounting standards on the rest of us. So your accountant, if he is preparing “true and fair” financial statements, has no choice about obeying these rules that the busybodies up top have made.

And one of them (not the least important, for owner managed businesses) is the rule that says that you can’t reduce your profits by making provisions for directors’ remuneration unless there is actually a legal obligation in place to pay the remuneration before the year end. (The remuneration also has to be reasonable in amount, but that’s another question.)

So it’s good practice these days, to say the least, although I don’t think it’s universal, for companies which stick in a figure for directors’ remuneration some time after the year end, when the accounts are being prepared, to make sure that a formal board resolution has been passed, before the year end, awarding a “fair” remuneration or bonus amount to named directors, the amount to be determined after the year end.

This would now seem to be a “must” for those companies which behave in the following manner.

The company we are looking at is dominated by one or two shareholders/directors. This director, or these directors, take out regular drawings from the company bank account, but don’t particularly characterise them as dividends, remuneration, or loan repayments at the time. Instead, the books go into the accountant who draws up a set of draft accounts for the year. Depending how much the profit is, and also, depending how much the directors concerned have drawn out, they then allocate an amount to directors’ remuneration, which they seek to have as a deductable expense. Strictly, though, it seems to me that remuneration may be refused tax deductibility by the Revenue if the amount put in the accounts wasn’t remuneration at the time it was paid. A subsequent decision to call it remuneration may not be in time to treat that as a deductable expense, if that resolution comes after the year end.

So it is always as well to have something in writing to forestall any possible such argument by the Revenue.

As far as I can see, although the directors’ remuneration is the main subject of this awkward restriction, the same could also apply to management charges between companies. Again, the way many groups of companies act is to establish charges between the various companies after the year end, when the draft profits are known. There can be a number of reasons, both legitimate and illegitimate, why groups might do this, but with no clear contract in place, creating a liability on the paying company to pay the management charge during the year, your group could be batting on a sticky wicket.

3. Incur Capital Expenditure

But now on to something a bit more positive. Did you know that you can have effective 100% relief for new capital expenditure, up to a limit, if you meet the size criteria? The so called “annual investment allowance” gives you the ability to write off up to £50,000 all in one year, but you have to have “incurred” the expenditure before the year end.

So if you were going to buy that new van, or machine, or have the kitchen or bathrooms in your office refitted, bringing the expenditure forward so that it is an obligation before your year end can make a very large hole in your tax bill, indeed. (Incidentally, if your business isn’t VAT registered, it can be a very good idea to incur any such expenditure before 31 December in any event, because VAT is going up from 17.5% to 20% in the New Year.)

4. Repay Directors’ Loans

In my view this is a topic where there is a difference between the theory and the practice.

It often comes about, with the smaller company, that the shareholder/director will borrow money from the company. Strictly, this is actually illegal, but most people don’t seem particularly bothered by that: the only sanction is that the company can “avoid” the loan, or some such theoretical legal jargon.

Of far more importance is the fact that a loan by a company to one of its shareholders, or “associates” of shareholders, gives rise to a tax charge. Where such a loan is still outstanding nine months after the year end, a company has an obligation to pay over 25% of the amount of the loan, as a sort of corporation tax, to the Revenue.

The reason for this rule is obvious: it’s to stop people taking loans from their companies instead of taxable dividends. If you go over the nine month period allowed for repayment by so much as one day, the tax falls due and you can’t get it back until nine months after the end of the period where the loan is repaid by you to the company.

But why am I talking about this under the heading of year end tax planning? Surely, if the loan is repaid within nine months after the year end, you haven’t got a problem?

Well, it’s more a practical problem than a theoretical one. If you’ve got a loan to a director in your balance sheet at the year end, this is one of the most likely things to attract HM Revenue & Customs attention, and could lead them to open an enquiry into the company’s accounts for that year. Any problems with the repayment of the loan could make this enquiry painful and embarrassing process.

What sort of problems could there be?

Firstly, it’s sometimes the case that such loans are “repaid” by the director transferring an asset to the company, like goodwill, or a property, or a car. How do you prove to the taxman that this happened before the nine months was up? With a property it may be easy enough, if you’ve formally conveyed the property into the company, but who can say when goodwill or cars actually change hands? There is an evidential issue.

Another potential problem that the taxman is on the lookout for, is where loan accounts are repaid to the company but then very shortly afterwards, loaned back out by the company again. The Revenue have been known to argue, probably with some conviction, that paying a cheque for £100,000 into the company bank account on 30 September isn’t real “repayment” if the company then writes you out a cheque for £100,000 back on 1 October. If you are going to play this kind of game, bear in mind that leaving the loan outstanding on your 31 December year end (if that’s the year end your company has) throws what is happening into high relief. Even if you have done things properly, and the taxman’s argument ultimately fails, you’ve had a not insubstantial amount of hassle arguing with him about it in the meantime.

5. Pension Contributions

Here is another thing that traditionally has to happen before the company’s year end in order to achieve the desired tax result.

If the company is looking to make a pension contribution into a Revenue approved (or rather, to use the new terminology “registered” scheme), it should do this in the period where it wants to get relief.

6. Unapproved Pensions

Again, I suppose, I should use the new jargon word “unregistered”. Interestingly, I’ve heard from more than one source recently that payments into some types of unregistered pension schemes can, in fact, secure tax relief providing they are reasonable in terms of the individual beneficiary’s services to the company.

Also, interestingly, it seems as though all you need in place by your year end is the legal obligation to make the contribution.

And even more importantly, there is no upper limit on the amount that the company can contribute, unlike with registered schemes, which are being hit really hard in this respect at the moment.

So, if your year end is 31 December, or even if you are reading this in mid November and your year end is 30 November, it may not be too late to establish an unregistered scheme of a sort, which, we are told, enables tax relief to be claimed for the contributions.

Once the contribution has been made, another benefit of the unregistered scheme is that there is little or nothing in the way of restrictions as to what the pension scheme does with the funds. Again unlike registered schemes, there is quite a lot of freedom for the money to be loaned back, more or less immediately, to the contributing company and other, associated business entities.

You might describe this as a “loophole”, but we’re not sure this would be a particularly fair assessment. There is evidence that the Government may want people save for their retirement, and if political motives have caused them to pare down to the bone the amount of pension monies that can enjoy complete tax exemption, that’s no reason why they should necessarily want to stamp on those who contribute to non exempt funds.

Plus, I am told that schemes of this sort put the money outside your estate for inheritance tax.

7. Partnership Shenanigans

I have obviously been concentrating mostly on companies in what I have written above. That’s because the vast majority of businesses are companies. But some of the more enlightened amongst us are making use of the partnership structure, to take advantage of its hugely greater flexibility in all kinds of tax respects.

One such example of flexibility is the ability (at least under current practice) to admit a limited company as a member of your partnership and allocate profits to it which will then, potentially, bear a lower rate of tax than the income tax you, as an individual partner, would have paid on those profits. But there is one important, and actually very obvious, requirement: the company actually has to be a partner in the accounting period where you are looking to give it profits. So, if you are a partnership coming up to its accounting year end, consider whether you should be looking at this now.

Missed the Boat?

If, by the time you read this, your accounting year end is actually finished already, you can, of course, store up anything you have read here that you find interesting or useful for the benefit of the next year end. However, if you don’t want to wait that long, for example, if you have incurred major capital expenditure early on in your accounting period, why not consider extending the year end of the business to include this earlier rather than later? As with so much tax planning, this isn’t rocket science, but just involves a creative and lateral approach to what you are doing.