The weeks leading up to the end of a company's financial year can be a very good time for the directors to stand back, take stock, and perhaps take some action on the financial front.
As a limited company is a separate "person" from its owners, the directors - those charged with running the company - are in the useful position of being able to influence, to varying degrees, what happens financially - and therefore what is reported in the profit & loss and balance sheet, come the year-end.
In turn, the directors can influence outcomes in a variety of areas: the corporation tax bill; how the company is perceived by credit rating agencies, lenders and shareholders; how efficiently working capital is managed; and a host of other outcomes.
But the timing is crucial: once the year-end is by with, there are fewer options available. So, when it comes to organising a company's finances, there truly is no time like the present.
Reasons to plan pre year-end
What sort of pre year-end planning measures might the directors of a limited company wish to consider? It depends to some extent on what their goals are, so that's a good starting point. For example, are they looking to:
- minimise the corporation tax bill?;
- present a strong balance sheet for lenders?;
- present good earnings levels to secure personal borrowing?;
- secure R&D tax credits?;
- demonstrate a track record of growth, with a view to 'selling up' or attracting outside investment?
These are just a few examples of the different motivations that might drive pre year-end planning activities (they are not mutually exclusive, either).
Although specific planning measures will be unique to each individual company, it is possible to group together some of the more common activities that we can assist our clients with. Here they are:
Influencing the timing of transactions
In some cases it may be possible (and desirable) to influence the timing of sales, either bringing forward, or delaying, when sales are made in order to impact the company's turnover. More frequently, directors can accelerate or delay discretionary spend in various areas, for example replacement plant & machinery; repairs, advertising, training, or product development.
The timing and amount of directors' remuneration and dividends can also be relatively easy to control and adjust according to circumstances.
The main benefit of controlling the timing of transactions is usually the cash flow benefit of delaying when corporation tax is paid.
Research & Development
Where there is R&D activity that may be eligible for R&D tax credits, care should be taken to structure the activities to maximise entitlement to the relief.
Profit extraction policy
Directors of smaller companies often have significant or even total control over how profits are extracted. The profit extraction approach should be reviewed periodically - and whenever there is any major change in circumstances - to ensure that it remains optimal, in terms of tax efficiency and the financial impact on the company and the individuals. Normally here, we are looking at a variety of issues, including:
- salary & bonuses;
- benefits in kind;
- employer pension contributions;
- dividends; and
- directors' loans.
Consideration may need to be given to whether a statutory audit may be required; or, if not required, whether a voluntary audit would be desirable.
The accounting policies should be kept under review, not only to ensure they remain prudent and commercially correct, but also to see that they are congruent with the company's overall financial aims. For example, what are the policies for:
- income recognition?;
- expensing or capitalising R&D costs?;
- recognising fixed assets at valuation, or depreciated historic cost?;
- fixed asset depreciation rates, useful lives and residual values?;
- stock valuation?; and
- provisions for bad debts, obsolete stock, warranty costs etc?
It may be appropriate to review the financial/ business model, for example:
- relationships with associated businesses - e.g. management charges, group tax reliefs;
- altering the year end to capture or exclude good/ not-so-good periods of trading;
- restructuring debt and equity;
- restructuring personal borrowing to maximise tax relief; and
- considering if an alternative structure to a limited company would be preferable.
Finally, with pre year-end planning there may be a temptation to focus heavily on the profit & loss account (sales, margins etc), but the balance sheet should not be overlooked. Consider what can be done to improve the working capital ratios and reduce gearing. Also, don't forget to consider repaying any overdrawn directors' loan accounts.
This is an abbreviated version of the pre year-end guide which we dispatch to all our limited company clients. For more details, or an in-depth review of your pre year-end approach, contact us today.