Are you in business? Do you pay income tax? Perhaps you have a company that pays corporation tax? As the deadline for settling your 2016/17 income tax liability approaches, it will soon be time to start thinking about finalising your affairs for the tax year ending 31 March/ 5 April 2018. As many methods of reducing business tax liabilities are time-critical, we recommend that you plan ahead, one or two months in advance.
There are a number of ways to manage and reduce your tax liabilities, depending on what forms of income you have, and (if applicable) your company’s circumstances. In this article we focus on one method - managing your business expenditure.
Why should I think about this now?
Companies pay corporation tax based on taxable profits for each accounting period. For a mixture of reasons, a disproportionate number of companies draw up accounts to 31 March each year. If that's what your company does, now is the ideal time to plan expenditure. By this time of year, you may have a pretty good idea what level of profits your company is likely to make. So it may be possible to estimate the corporation tax exposure. If you can do this, you can then quantify the tax effect of expenditure incurred between now and the period end.
Sole trader/ partnerships
Similar principles apply. The income tax year ends on 5 April. An individual's profits from a sole trade or partnership business will be included in his or her tax return based on the business's accounting year-end date under a complicated system known as the 'basis period rules'. If your accounts are drawn up to 28 February, for example, profits for the accounting year ending 28 February 2018 will usually be included in the tax return for the tax year ending 5 April 2018. As with companies, it makes sense to quantify the tax exposure and start planning any expenditure, one to two months before the accounting year end.
For any other personal tax planning, ideally you should again consider tax planning measures well in advance of 5 April.
How can I use expenditure planning to manage my tax exposure?
The tax system offers relief for various types of expenditure, many of which apply in similar (although not identical) ways both to companies and to unincorporated businesses. Common methods of expenditure planning prior to the end of the accounting year include:
- Purchasing plant and machinery, where this gives entitlement to claim capital allowances (using asset finance may help);
- Making pension contributions, although the method of relief will depend on whether the contribution is made by employer or employee;
- Employing family members, although care must be taken to approach this correctly; and
- Voting dividends, which may be received by shareholders free of income tax to the extent they fall within the dividend nil rate band.
If you wish to review these options or require further information on tax and expenditure planning, do contact us.
Some of the above measures may be applicable even if the business is loss making, as there will be circumstances where a tax loss can be generated and relieved against other taxable income of the current or previous tax years. This, of course, requires careful planning and advice should be sought from your accountant.
Even if your business’s year end has already been and gone, there may be tax planning measures for 2017/18 that can still be taken prior to 5 April. For example, there is still time to make pension contributions which may attract basic and, if applicable, higher rate relief, in the right circumstances.
One more point for winter sun seekers. If you earn most of your income outside of the UK, you may want to check if you are considered to be tax resident in the UK. The amount of tax you pay on income earned overseas will depend whether you are UK resident or non-UK resident. There are a number of ‘tests’ to consider, which includes the number of days you have stayed in the UK during the year. One or two lucky individuals may be able to save money by going on holiday!
If you think you and your business could benefit from a little pre year-end tax planning, whether it be preparing a detailed set of management accounts and budgeting your profit to the end of the year, or obtaining advice on other corporate or personal tax matters, please contact us and we will be happy to help.