Feeling cost conscious? Andrew Wilkes offers some pointers to help manage your tax charge.
Tax is an important element in the financial health of a company. Businesses should make sure they are maximising the benefits of the tax reliefs available and that deductions for costs are accelerated where possible.
Ten Ways To Manage Tax
1. Review Provisioning Policies
Assess provisioning policies to ensure that provisions for expenditure of a revenue nature are made in accordance with FRS 12 and are allowable for corporation tax purposes. As far as bad debt provisions are concerned, there should be documentary evidence of action taken to attempt to collect the relevant debts. HM Revenue & Customs could seek to disallow a specific provision where no such action has been taken.
2. Watch Out For Discretionary Bonuses
Where discretionary bonuses are to be paid, directors should evidence by letter before the year-end the possibility that bonuses for the current year may be declared. These bonuses will need to be paid within nine months of year-end in order to be tax deductible in the period they are charged to the profit and loss (P&L) account.
3. Get Tax Deductions For Repair Work
If a company has a legal obligation to carry out future repair work (for example under the terms of a lease), it is possible to obtain a tax deduction for this, provided there is an appropriate provision in the accounts. If there is no legal obligation, a tax deduction is only available if the repair work has been carried out by the year-end.
4. Take Care Over Revenue Deductions
Caution should be taken to avoid capitalising costs which would be treated as a revenue deduction for tax purposes if charged to the P&L account. Relief will only be allowed to the extent a deferred revenue charge is made to the P&L account, such as by depreciation of the capitalised asset.
5. Maximise Tax Relief On Pension Contributions
Employers' pension contributions must be paid by the end of the year to obtain corporation tax relief in that year.
6. Plan For Capital Allowances
There are important changes to the rules relating to capital allowances that should be planned for. Annual writing-down allowances have been reduced from 25% to 20% and there will be an annual investment allowance of £50k for plant and machinery. Companies should consider specific timings of additions, for example deferring some capital expenditure to a subsequent period may benefit a company if it is able to take advantage of two tranches of the annual investment allowances.
7. Reclassify Expenditure On Industrial Buildings
The abolition of industrial building allowances (IBAs) means that taxpayers should consider whether expenditure could be reclassified as plant and machinery or building repair work. If it can, tax relief for periods to 2011 can be accelerated and will avoid the permanent loss of tax relief after this date when IBAs are abolished. Reclassification of expenditure from industrial buildings to plant and machinery is not possible once IBAs have been claimed but can be carried out in respect of open periods (at least two years). However, for reclassification as capitalised repairs it may be possible to reopen up to six years under an error or mistake claim.
8. Claim R&D Tax Relief
Companies involved in creative or innovative work in the field of science and technology may be able to take advantage of research and development (R&D) tax relief. As of 1 April 2008, the R&D relief rates increased from 150% to 175% for small or medium enterprises (SMEs) and from 125% to 130% for large companies. There is also a possibility for SMEs to claim a payable tax credit.
9. Look At Corporate Structure
In general, companies should also look at their corporate structure to ensure there are no tax leakages. This is particularly relevant for international businesses to ensure they are making best use of the differences in tax rates in each country and making sure they avoid double taxation. This may necessitate some group restructuring or changes to the group's financing arrangements or internal operating procedures.
10. Don't Forget Compliance
Companies should also look at the cost of dealing with their tax compliance obligations. Groups of companies could consider amalgamating the trades of various subsidiaries into a single company, which should reduce audit and tax compliance costs. In addition, companies should work closely with their tax advisers to look at ways of reducing professional fees, for example by undertaking more work in-house and working together to make processes more efficient.
Finally, companies should ensure that budgets and forecasts correctly reflect tax cashflow and factor in future changes in tax rules and planning. In these uncertain times companies do not want unexpected cash outflows.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
