Accelerating Expenses &
Year End Tax Planning for Businesses
In this article, we will take a detailed look at a variety of year-end tax planning strategies.
By deferring income for just one day, it may be possible to postpone tax for a whole year; by accelerating expenses, it is often possible to enjoy tax relief one year earlier.
Year-end tax planning is even more powerful if you expect your tax rate to fall for the next year: you will not only be postponing tax, you will be saving it as well.
Business Year-End Planning
For business owners, there are effectively two types of year-end planning to be considered.
Firstly, there’s personal year-end planning: things like making pension contributions or investing in tax shelters like venture capital trusts. The tax year end on 5th April is the key date for this type of planning.
In this article, however, I am going to focus on business year-end planning: where your own accounting date is the key date.
For example, a sole trader with a 31st March accounting date needs to take action by 31st March 2011 to save tax for 2010/11; a sole trader with a 30th April accounting date has until 30th April 2011 to take action which will save them tax for 2011/12.
Business year-end tax planning should generally only be about accelerating the expenditure that you need to make anyway: it’s seldom worth spending extra money just to save tax.
Any liabilities created by your accounting date can reduce your taxable profits, even if you only pay the bill later.
In a few instances, where there is a legal obligation to have work carried out, just getting a quote by your accounting date may be enough – repairs required to get an M.O.T. certificate on a van would be a good example.
The easiest way to reduce your tax bill is to buy large items which qualify for an immediate 100% deduction under the annual investment allowance. Examples include vans, computers and office equipment. Integral features in commercial property also qualify, including wiring, lighting, plumbing, heating and air-conditioning.
Cars are another item that can help business owners cut their tax bills. You can claim up to 20% of the cost as a tax deduction (10% if the car has higher CO2 emissions).
For self-employed business owners, the allowance is restricted to reflect private use, but even just one quarter business use of a £20,000 car could give you a deduction of £1,000.
New cars with CO2 emissions of 110g/km or less are eligible for an immediate 100% enhanced capital allowance.
If you are selling a car, you will also often benefit by completing the transaction before your accounting date. Sales of cars often give rise to balancing allowances which can sometimes significantly reduce your taxable profits. (Beware, however, that balancing charges can also sometimes arise: so do your sums first.)
Landlords (except companies) are taxed on a tax year basis and therefore generally prepare accounts to 5th April each year: so both of the key year-end planning dates are usually the same.
One of the best ways for landlords to save tax is to carry out property repairs before the tax year-end. Anything classed as an improvement is no help, however, as tax relief on this expenditure is only provided when the property is sold.
Some types of property expenditure are often classed as repairs for tax purposes BUT still increase the value of your property: such as new (replacement) kitchens or bathrooms, double glazing, re-wiring and decorating.
Many property investors think of these items as improvements, but they are often fully tax deductible repairs, providing you follow the rules.
For businesses supplying goods, it makes sense to consider delaying the completion of sales until after the accounting date, so that the profit falls into the next period. Commercial pressures will often dictate the opposite, however!
Sadly, for businesses supplying services, deferring income is not as easy as it used to be. A few years ago, these businesses could defer income just by delaying the issue of an invoice. Unfortunately, you are now generally required to include all of the income which has effectively been earned by the accounting date, whether invoiced or not.
However, where commercial pressures allow, you could still consider putting off some work until after your year end, so that the income ‘earned’ by that date is less. Most people would agree that two half-finished jobs are worth less than one completed one.
Change Your Accounting Date
One of the most radical year-end tax planning strategies you can adopt is to change the year-end itself! Most businesses are free to change their accounting date at least once every six years.
Company owners may be able to save tax by extending their accounting period if the company’s profits are falling, or by shortening their accounting period when profits are rising. Sole traders and partnerships may also benefit from changes to their accounting date in some cases.
Year-end Planning in Reverse
If you expect to be paying tax at a higher rate in the next tax year, it may be better to do the complete opposite: accelerate your income and defer your expenses.
Those who may wish to consider reversing their year-end tax planning in this way include individuals expecting their marginal tax rate to rise from 20% to 40%; or from 40% to 50%.
The usual reason your marginal tax rate increases is because your income has gone up. However, changes currently proposed by the new Coalition Government mean that many taxpayers will suffer an increased tax rate even though their incomes have not increased.
The Government proposes to gradually increase the tax-free personal allowance to £10,000 between now and 2015. However, to prevent hard-working middle-income earners from benefiting, the 40% tax threshold is to be reduced from the current level of £43,875 to just £42,475.
Joe, a sole trader with a 31st March year end, expects his taxable income for both 2010/11 and 2011/12 to be £45,000 each year. He wishes to spend £5,000 on some new equipment and is wondering when to make his purchase.
If he buys the equipment by 31st March 2011, his total tax saving (Income Tax and National Insurance) will be £1,546. If he buys the equipment after his year end, his saving will be £1,778.
Hence, deferring his purchase would save Joe an extra £232.
Some companies may also benefit by delaying expenditure until their next financial year. For example, companies that expect their profits to rise above £300,000 next year will enjoy tax relief at around 28% by delaying expenditure, compared with between 20% and 21% in the current year.
How to Accelerate Income and Defer Expenses
If you expect your tax rate to rise next year, you may wish to consider accelerating income or deferring expenses in order to bring more taxable income into the current year. Some of the techniques you could consider include:
- Landlords: grant short leases at a premium before 6th April instead of charging rent next year.
- Employees: take bonuses before 6th April in lieu of salary or bonuses normally receivable in 2011/12.
- All businesses: defer capital expenditure in order to claim the annual investment allowance next year instead of this year.
- All individuals: defer gift aid and pension contributions to after 5th April.
- All businesses: complete orders and projects and bring billing up to date. Accounting rules often require part-completed work to be brought into account, but there is still a large element of profit dependent on completion and billing in many cases. For example, two half completed projects are, in accounting terms, likely to yield less profit than a single completed project of the same size.
- Company owners: take salary or (more usually) dividends before 6th April instead of in 2011/12.