Despite a difficult year, it looks like the accounts will show a profit after all. What could you look at to legitimately reduce the corporation tax bill the company has to pay? Kenny Logan advises.
Generally, expenses that the company incurs are tax deductible. However, special rules mean that tax relief for some expenses might be given for a different financial year than that in which they are recorded for accounting purposes. When tax planning for your company, especially near its financial year end, it is important to know when you can use the timing differences to your advantage. There are four areas to look at: bonuses, stock, pensions and expenses.
Awarding a bonus or extra salary for the company’s owner managers will reduce the corporation tax (CT) bill but need not cost the company anything immediately.
A bonus can be proposed subject to approval of the company’s accounts. The owners will not have to pay tax and NI on it until the date the accounts are finalised and approved. The bonus does not have to be paid to the directors. They can leave the cash in the company for as long as they want as a credit to their directors’ loan accounts.
For example, your accountant will provide the accounts for the year to 31 March 2021 for approval in, say, June. You defer approval until early September. You must make a PAYE report on the date the accounts are approved and pay the tax and NI due on or before 19 October.
The lower the value of stock at the end of the company’s financial year the less the company’s CT bill will be.
Make sure that your stocktake is thorough. For example, unusable materials should be valued at zero in your books. Also, any goods that are expected to sell for less than they cost the company, e.g., because they are old stock, can be included in the accounts at sale price instead of their cost.
Any pension contribution paid by the company by the end of its financial year will reduce its tax bill. However, there is a tricky tax rule you need to be aware of.
For most types of expense, you’re allowed to accrue a deduction, i.e., claim it for the financial period in which you become committed even though it won’t be paid until after the financial year. This does not apply to a pension contribution. Instead, a deduction is allowed for the financial year in which it is paid to the pension company.
If the company intends to buy equipment next financial year, whether it’s a car, machinery or new computers for the office, by signing the purchase agreement by the end of the current financial year the tax deduction (capital allowances) can be claimed a full year earlier.
EXAMPLE ABC Ltd’s financial year ends on 31 March, its two directors plan to buy new company cars in July. If they sign the contract by 31 March, they can claim the tax deduction for the full cost of the car if payment is made within four months. However, the four-month rule does not apply to HP and similar types of purchase arrangement.
You could propose a bonus subject to approval of the accounts. This will reduce the corporation tax, while the PAYE and NI is not payable until the month following the approval. The net bonus can be left in the company.
You could write off unusable stock and revalue items that are expected to be sold below cost. You could also bring forward the purchase of new equipment.