UK: Top Tax Tips For Troubled Times - Managing Corporation Tax

Last Updated: 3 February 2009
Article by Mark Webb

Mark Webb offers some suggestions on how to effectively manage your company's corporation tax liabilities in a downturn.

As the property industry is facing a particularly acute downturn, businesses will need to review and tighten processes. Therefore, the opportunity to manage your company's corporation tax burden should not be overlooked.

Tips to manage corporation tax

Make provisional loss claims

If a trading company becomes lossmaking, the delay between paying tax for the previous profitable year, say 2007/08, and using losses from 2008/09 to reclaim the 2007/08 tax can have a detrimental effect on cash flow. However, if there are losses in a period, the company can put forward a provisional claim for those losses to be carried back. This can reduce a tax liability which would otherwise be due. Presently, companies can carry back £50,000 of qualifying losses for three years, in addition to the normal one-year carryback relief.

Consider stock writedowns

Accounting rules require trading stock to be held at the lower of cost and net realisable value. At the moment, some sizeable stock writedowns are likely. These writedowns are generally an allowable deduction for tax purposes, so companies should consider their effect carefully with regard to the following.

  • Current year profits and the creation of losses.
  • How to use the resultant losses (i.e. group relief or carry back).
  • Planning if trading losses are to be carried forward.

Accrue for costs/bad debts

If costs are incurred the diligent accrual of these should maximise the reduction of taxable profits, and thereby the tax payable. Similarly, any specific bad-debt provisions should be made to reduce taxable profits.

Review capital expenditure and claim capital allowances

There have been a number of changes to the capital allowances regime that property companies can use to their advantage. In particular, the introduction of an integral features pool, with the rate of allowance set at 10%, should not be overlooked. This has expanded the expenditure on which capital allowances can be claimed. Additionally, certain expenditure may qualify for enhanced capital allowances, enabling relief at 100%. Therefore, you should review all capital expenditure to ensure that relevant capital allowances are claimed in full.

Apply for enhanced tax reliefs

If your company is carrying out any remediation or renovations, there are a number of less well-known tax reliefs that you should review to ascertain if they are applicable. Three of these reliefs are particulary relevant, namely:

  • business premises renovation allowances
  • land remediation relief
  • flat conversion allowances.

These reliefs can result in accelerated or enhanced tax losses and, in some circumstances, payable tax credits, thereby improving cash flow.

Claim refunds of quarterly payments

Companies and groups within the corporation tax quarterly payment regime may have made instalment payments based on projections which are over-optimistic in current market conditions. Where reduced or £nil corporation tax liabilities are now forecast, any overpayments of instalment payments made to date should be reclaimed without delay.

Relieve profits from cessation of trading activity

If there is a cessation of a company or group's trade, and trading losses are incurred in the final year of that trade, these can be carried back up to three years from the start of that final year. This potentially valuable measure could result in tax refunds which can increase cash available on cessation.

But it's not just about the tax

However, there are a number of practical and commercial factors to consider. These suggestions are not exhaustive, but generally companies should look to:

  • optimise cashflow
  • claim all available reliefs
  • review capital expenditure plans
  • ensure effective compliance and administration.

In considering these general business principles for a downturn, the contribution that effective tax planning can make should not be ignored. Please contact us to discuss how your business can benefit from effective management of tax obligations.

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.

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