Planning for the year end

Do you need to sharpen your business focus?

The economic downturn has sharpened the focus of all business managers and owners, especially in the area of managing cashflow. Paradoxically, the profits generated from the success achieved in a previous year, could cause significant cashflow problems when it comes to paying a future corporation tax liability. So here are some areas you could consider to make your corporate life somewhat less stressful.

From 1 April 2008, the annual allowances for expenditure on plant and machinery capital allowances were reduced from 25 per cent to 20 per cent. Having said this, there is still an opportunity to maximise allowances by ensuring any qualifying expenditure is incurred during the period which straddles 1 April 2008. Companies planning to acquire new equipment should therefore ensure that it is incurred before the year end to accelerate and increase the deduction. It is important to see if higher rates of allowances can be claimed by using the £50,000 Annual Investment Allowance or claiming 100 per cent enhanced capital allowances on certain expenditure on green technologies.

Provisions should be carefully documented and evidence retained so that companies can demonstrate that they have been calculated with sufficient accuracy. A tax deduction can then be taken in the year when the provision is created. Otherwise, the tax deduction may be deferred until the payment is made. Broadly speaking Accounting Standards only permit the recognition of a provision where a legal or constructive obligation arises as a result of an event before the balance sheet date. Therefore companies who are in the unfortunate position of having to reduce headcount may wish to announce and quantify the cost of the programme before the year end, even if the reorganisation will not be implemented until the following year.

Enhanced deductions and/or tax credits are available for revenue expenditure on research and development (R&D). The definition of R&D is wider than most companies realise; it is not restricted to research companies and claims have been made in most business sectors including retail, IT, media and transport. The relief itself can result in an additional tax deduction of up to 75 per cent for eligible expenditure. This could translate into a £21,000 additional tax saving for every £100,000 of expenditure or a payable tax credit of £24,500 for loss making companies.

In July last year HMRC announced changes to the timing of a deduction for interest payable to non-resident connected companies. In effect this has enabled companies to deduct interest on such loans as it accrues rather than wait until it is paid. This will accelerate the tax benefits available on these payments and companies should assess whether they wish to take advantage of the relaxation of the rules.

Relief can be obtained for the exercise of employee share options or share awards. A deduction is available for an amount equal to the difference between the market value of the shares and the amount paid by the employee.

Pension contributions are normally tax deductible on a paid basis. Therefore, contributions should be paid before the year end to accelerate the tax relief. Where a company is making an abnormally large contribution (perhaps to fund a pension deficit), it should take care that it structures payments to avoid deductions being deferred under the pension spreading rules.

There is a two year window within which most claims and elections can be amended. It is worth carrying out a review of the claims before the time limit expires to ensure that the most beneficial reliefs have been claimed in the light of the profits/losses arising in subsequent years.

Be aware of the options available with regard to any losses. For example a previously profit making company could carry back losses to the previous year and secure a tax refund. The chancellor recently announced that up to £50,000 of trading losses can be carried back against profits earned up to three years ago. In addition to securing a cashflow advantage, losses may be relieved at the higher rate of corporation tax of 30 per cent rather than 28 per cent going forward.

Large companies, typically those with profits over £1.5m (reduced in proportion to the number of associated companies)) have to pay tax in instalments based on forecast profits for the year. Regular and accurate forecasting will enable a company to reduce its tax payments as soon as profits begin to fall. There may even be scope for companies to claim refunds for excessive instalment payments.