Accountants and business advisers Friend Partnership discuss tax planning in the start of a series of blogs dedicated to OMBs (owner managed businesses).
I am now going to concentrate on limited companies with a series of blogs specifically targeted at such entities and their owners:
- Tax planning;
- Management and staff incentives;
- Ownership structure;
- Profit extraction;
- Onward sale; and
- Succession planning.
Some straightforward planning opportunities are detailed below in no particular order of priority:
- Deferring income and advancing expenditure is the simplest way to reduce tax liabilities. However, the commercial pressure for good results and the strictures of the accounting regime means that this is very rarely a practical approach.
- Provisions – ensure that all stock, bad debt and other provisions made in the year are specific in nature and amount as these will be deductible for tax purposes. General provisions, such as 5% of bad debts, will not be allowable.
- Pension payments – are deductible for tax but only in the accounting period in which they are paid – a year end accrual is not sufficient. In view of the fact that individuals can now access their pension pots more easily pension planning has become more attractive than it has been in the past.
- Management/staff bonuses – if there is a commitment at the year end to make such bonus payments they will be deductible in the period so long as they are paid within nine months of the end of the period. This gives the company the flexibility to agree the amounts to be paid after the financial results for the year are known.
- R&D – if the company is undertaking R&D it will be very important to ensure that all necessary conditions are met to enable the company to claim an enhanced deduction of 130% (from 1st April 2015) of the R&D expenditure incurred in the year. So for every £100 spent a tax deduction of £230 is available. In certain situations R&D losses can be surrendered in return or a tax payment at 14.5% of the amount surrendered. The big question is quite simply; is the company carrying on a qualifying R & D activities.
- Patent box – if profits are being generated by a company as a result of the exploitation of patents which the company has secured ensure that all the necessary conditions are met to secure the reduced tax liability – 10% by April 2017. The rules have been challenged by Germany because the UK legislation is viewed as favouring the UK and is thus deemed as anti-competitive. This threat now seems to have disappeared.
- Intangible assets – a deduction may be available in certain situations for the amortisation of intangible assets. The legislation was changed by the Summer Budget such that a deduction for the amortisation of goodwill and customer related intangibles is no longer available but remains for other intangible assets.
- Capital allowances – with the Annual Investment Allowance at £500,000 (£200,000 for expenditure after 1st January 2016) for most companies capital expenditure should qualify for a 100% deduction. This can have an important bearing on the company’s cash flow. If an item of plant is acquired under an HP agreement capital allowances will be available on the full capital cost of the plant on the day the contract is signed, i.e. there is no spreading of the relief over the term of the contract. Certain assets, such as integral features, have to go in to separate pool for capital allowance purposes. With any major capital expenditure project it will be important to ensure that capital allowances are thought about up front so that all the necessary paperwork can be generated and retained.
- Profit extraction – remember that dividends are not deductible for corporation tax purposes but salaries and bonuses are. Dividends require distributable reserves but salaries do not.
- Notwithstanding the changes announced in the Summer Budget the tax regime is such that it is still more beneficial, from a total tax point of view, to take profit from a company by way of dividend rather than salary. This is still relevant for those director shareholders in a position to do so.
- Creative sector – there are various reliefs available to companies involved in creative sector activity, TV/video/theatre etc.
There may be other reliefs available depending upon the company’s particular activities.
With all tax planning care is needed in light of HMRC’s expanding raft of anti-avoidance legislation which can in certain cases catch simple planning initiatives.
However, if the above ideas are properly dealt with no issues of concern should arise.