Corporate
and business tax
Tax
Saving Opportunities for Companies
Due
to the ever changing tax legislation and commercial factors
affecting your company, it is advisable to carry out an annual
review of your company's tax position.
Pre-year end tax planning is important as the current year's
results can normally be predicted with some accuracy and time
still exists to carry out any appropriate action.
We outline below some of the areas where advance planning
may produce tax savings.
For further advice please do not hesitate to contact us.
Corporation
Tax
Advancing
expenditure
Expenditure incurred before the company's accounts year end
may reduce the current year's tax liability.
In situations where expenditure is planned for early in the
next accounting year the decision to bring forward this expenditure
by just a few weeks can advance the related tax relief by
a full 12 months.
Examples
of the type of expenditure to consider bringing forward
include:
- building
repairs and redecorating
- advertising
and marketing campaigns
- redundancy
and closure costs.
|
Note that payments into company pension schemes are only allowable
for tax purposes when the payments are actually made
as opposed to when they are charged in the company's accounts.
Capital allowances
Consideration should also be given to bringing forward capital
expenditure on which capital allowances are available.
Generally an annual allowance of 25% is given for expenditure
on plant and machinery. Small and medium sized businesses
(as defined by company law) qualify for higher allowances
in the year of expenditure generally at 40% but 50% for small
companies for 12 months from 1 April 2004. Small businesses
(as defined by company law) qualified for a 100% allowance
on expenditure incurred between 1.4.00 and 31.3.04 on computers,
software and internet-enabled mobile phones. The thresholds
for small and medium-sized companies have been increased so
that many more businesses will qualify for the enhanced allowances.
Expenditure on designated energy-saving technologies and products
qualifies for 100% allowances (from various start dates).
Details can be found on a web site - www.eca.gov.uk
Allowances are also available for investments in certain types
of building.
Trading losses
Companies incurring tax losses have three main options to
consider in utilising these losses:
- they
can be set against any other income (for example bank interest)
or capital gains arising in the current year
- they
can be carried forward and set against trading profits arising
in future years
- they
can be carried back for up to one year and set against total
profits.
Extracting
profits
Directors/shareholders of family companies may wish to consider
extracting profits in the form of dividends rather than as
increased salaries or bonus payments.
This can lead to substantial savings in national insurance
contributions.
Note however that company profits extracted as a dividend
from 1 April 2004 onwards suffer a minimum corporation tax
charge of 19%.
Dividends
Since the abolition of advance corporation tax (ACT), from
the company’s point of view timing of payment is not
critical, unless there is surplus ACT still available.
But from the individual shareholder’s perspective, timing
can be an important issue. If the shareholder is a higher
rate taxpayer, a dividend payment which is delayed until after
the tax year ending on 5 April may give the shareholder an
extra year to pay any further tax due.
The deferral of tax liabilities on the shareholder will be
dependent on a number of factors. Please contact us for detailed
advice.
Loans to directors and shareholders
If a 'close' company (broadly, one controlled by its directors
or by five or fewer shareholders) makes a loan to a shareholder,
this can give rise to a tax liability for the company.
If the loan is not settled within nine months of the end of
the accounting period, the company is required to make a payment
equal to 25% of the loan to the Revenue. The money is not
repaid to the company until nine months after the end of the
accounting period in which the loan is repaid by the shareholder.
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
For the 2004 financial year :
- If
annual taxable profits do not exceed £10,000 they
are charged to corporation tax at the starting rate of 0%.
If profits are above £50,000 and do not exceed £300,000,
they are charged at the small companies rate of 19%.
- If
the profits exceed £1,500,000, the full rate of 30%
applies.
- If
profits fall between these limits, marginal relief is given.
All the profits are charged to tax at a rate between 0%
and 19% (where profits are between £10,000 and £50,000)
and 19% and 30% (where profits are between £300,000
and £1,500,000).
- From
1 April 2004, the benefit of corporation tax rates below
19% where profits are below £50,000 is only available
where profits are retained within the company. A new regime
imposes a minimum 19% corporation tax rate where profits
are taken out of the company as a dividend.
Self
assessment
Under the self assessment regime most companies must pay their
tax liabilities nine months and one day after the year end.
Companies which pay (or expect to pay) tax at the main rate
(30%) are required to pay tax under the quarterly accounting
system. If you require any further information on the quarterly
accounting system, we have a factsheet which summarises the
system.
Corporation tax returns must be submitted within twelve months
after the year end. In cases of delay or inaccuracies interest
and penalties will be charged.
Capital
Gains
Companies
are chargeable to corporation tax on their capital gains less
allowable capital losses.
Indexation allowance
In order to counteract the effects of inflation inherent in
the calculation of a capital gain, an indexation allowance
is given. However the allowance is not allowed to increase
or create a capital loss.
Timing of disposals
Where possible gains should be made in periods where profits
are taxed at only 0% or 19%, as opposed to the full rate of
30%.
Consideration should therefore be given to the timing of the
disposal and the delay of a sale may be advisable.
Purchase of new assets
It may be possible to avoid a capital gain being charged to
tax if the sale proceeds are reinvested in a replacement asset.
The replacement asset must be acquired in the four year period
beginning one year before the disposal and only certain assets
qualify for relief.
How
We Can Help
Tax
savings can only be achieved if an appropriate course of action
is planned in advance. It is therefore vital that professional
advice is sought at an early stage. We would welcome the chance
to tailor a plan to your specific circumstances.
Top
of page
For information of users: This material is published
for the information of clients. It provides only an overview
of the regulations in force at the date of publication, and
no action should be taken without consulting the detailed
legislation or seeking professional advice. Therefore no responsibility
for loss occasioned by any person acting or refraining from
action as a result of the material can be accepted by the
authors or the firm.
|
C o m p l e t
e 
Regulated
to carry on audit work for a range of investment business
activities by the Institute of Chartered Accountants in England
and Wales