December 13th, 2016
While every attempt will be made to ensure that information provided is accurate at the time of publication, it should be treated as guidance only and does not constitute legal or professional advice. Tax law and guidance changes frequently and readers are advised to consult the current relevant product for the most up-to-date information on this topic.
With Christmas now fast approaching, companies with an accounting date of 31 December have a final opportunity to review their tax position for the period and to take advantage of any opportunities to make tax savings or to avoid potential pitfalls.
Where transactions have been planned to take place around the year end it may be more tax effective to defer income or gains to the following accounting period to reduce the taxable profits of the current period or to achieve the same effect by advancing revenue or capital expenditure. Income may be deferred by, for example, timing sales of goods, services or assets to fall into the later accounting period. Possible items of expenditure which could be brought forward might include staff bonuses, pension contributions and purchasing assets qualifying for capital allowances.
The corporation tax rate will be reduced from 20% to 19% for financial year 2017. This means that the part of any deferred profits apportioned to the part of an accounting period falling in financial year 2017 will benefit from the lower rate. In some cases, a reduction in profits may prevent the company from falling into the instalment payment regime.
Deferring profits should also be considered with a view to increasing current trading losses which can be carried back and offset against profits of accounting periods ending in the previous year. This would provide a cash flow advantage and in some cases may enable losses to be relieved at a higher rate of corporation tax. There may also be circumstances in which it would in fact be beneficial to advance income or delay expenditure to reduce a loss which is not immediately relievable. It should be borne in mind that trade and property business profits must be calculated in accordance with generally accepted accounting practice, subject to any adjustment required or authorised by tax law, so that any deferral or advancement of income or expenses must usually be recognised in the profit and loss account in the relevant accounting period for the hoped for tax effect to apply.
The effect of bringing forward expenditure will be enhanced if the expenditure qualifies for a particular tax relief. For example, a small or medium-sized enterprise which incurs revenue expenditure on research and development (as specifically defined) can obtain relief for 230% of that expenditure. Capital expenditure on plant or machinery for use in a trade or other qualifying activity may qualify for a 100% annual investment allowance (AIA) or first-year allowance (FYA).
The annual limit for expenditure to qualify for AIA is now £200,000. A company can only use one AIA in an accounting period, no matter how many qualifying activities it carries on, but can choose how the amount is allocated between activities to maximise its use. Similarly, only one AIA is available to a group of companies or to companies under common control, but again the companies can choose how to allocate it. First-year allowances usually only need to be considered where a company's expenditure on plant or machinery exceeds the AIA maximum. In such a case first-year allowances should be claimed in priority to AIA, as this leaves the AIA available for expenditure not attracting FYAs. No AIA is due on a car, but writing-down allowances at 18% per year (instead of the normal 8% rate) can be claimed for cars with CO 2 emissions of not more than 130 g/km. The limit will be reduced to 110 g/km for expenditure incurred on or after 1 April 2018.
In considering whether to bring forward capital expenditure to obtain capital allowances in a particular accounting period, it should be remembered that expenditure is treated as incurred (and an entitlement to allowances therefore arises) as soon as there is an unconditional obligation to pay it. This is subject to certain exceptions, in particular where there is an agreement under which an unconditional obligation to pay is brought forward on non-commercial terms in order to accelerate an entitlement to allowances.
Where a company has a chargeable gain in the accounting period it should consider whether it might dispose of assets which will give rise to a loss which can then be set off against the otherwise chargeable gain. In particular if the company holds assets which have become of negligible value a claim for relief can be made resulting in a deemed loss. Similar considerations arise, of course, if the company has realised an allowable loss against which it could potentially set a chargeable gain.
Owner-managed companies also need to consider whether surplus profits should be extracted from the company as dividends or bonus or retained in the company. The optimum strategy will depend on the tax and NIC position of both the company and the director/shareholder. Retaining profits in the company will avoid an immediate income tax charge but may increase the value of the company if the shares are subsequently sold. Retention of substantial profits within the company may affect the availability of entrepreneurs' relief, which reduces the rate of CGT from 20% to 10%, if the funds are actively invested outside the company's trade. The reform of the dividend rules which took effect from 6 April 2016 also needs to be considered. The changes provide for an income tax-free dividend allowance of £5,000, the abolition of the tax credit and new income tax rates of 7.5%, 32.5% and 38.1% depending on the shareholder's income. For many shareholders this will represent a tax increase, so a review of dividend policy may be worthwhile.
The company's accounting date will in many cases also be the last chance to review the tax position for earlier years. Where, for example, a company has a consistent accounting date of 31 December, amendments to the return for the year ended 31 December 2014 cannot be made after 31 December 2016. Claims which must be included in the return, such as for capital allowances, are subject to the same time limit. Loss relief claims must be made within two years of the end of the accounting period in which the loss was made. Some claims are subject to a four-year time limit, so that a company with a 31 December accounting date must make any claim for the year ended 31 December 2012 by 31 December 2016. Although not subject to a formal time limit, a claim to create a deemed loss on an asset of negligible value can be referred back up to two years (providing the asset was of negligible value both at the date of claim and at the date specified in the claim), so that a claim made by 31 December 2016 could give rise to a loss in the year ended 31 December 2014. Any potential claim to rollover relief should also be reviewed. To qualify for the relief, a new qualifying asset must be acquired within three years after, or one year before, the qualifying disposal. Companies should consider advancing or delaying planned capital expenditure on assets to fall within these time limits, thus ensuring deferral of capital gains.
As with any planning, it may be necessary to ensure that specific anti- avoidance legislation and the general anti-abuse rule will not apply or that the planning may not be challenged by HMRC on 'Ramsay' lines. Avoidance continues to have a high profile in the media with the tax affairs of celebrities and multinationals coming under the spotlight during 2016. Meanwhile, the Finance Act 2016 included the usual raft of new and improved anti-avoidance and penalty provisions. Although it is necessary to bear these developments in mind, straightforward year-end tax planning should not be affected.
TolleyGuidance includes more detail on the strategies mentioned above and other year-end planning ideas for income tax, capital gains tax and national insurance contributions. Perhaps most importantly, it sets out the potential pitfalls of which to be wary. Simon's Taxes and Tolley's Tax Planning includes chapters on year-end planning for all the main direct taxes including corporation tax.