Your company’s financial year ends soon. Despite the difficult trading conditions over the last year the accounts will show a profit. But what steps can you take to legitimately reduce the corporation tax bill? Joanne Gibson advises.
Generally, expenses that your 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.
Pay directors’ bonuses
Awarding a bonus or extra salary for the company’s owner managers will reduce your company’s corporation tax (CT) bill but this needn’t cost your company anything immediately.
You can propose a bonus subject to approval of the company’s accounts. In order to be deductible for Corporation Tax purposes, the bonus must be paid to the directors through a payroll within 9 months of the financial year end. The bonus will be subject to PAYE and NIC in the same way a salary would be. The bonus doesn’t have to be paid out 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.
Write off stock
The lower the value of your stock at the end of your company’s financial year, the less your company’s CT bill will be.
Make sure that your stocktake is thorough and any unusable materials should be valued at zero in your books. Also, any goods that you expect to sell for less than they cost your company, such as because they’re old stock, you can include in your accounts at sale price instead of their cost.
Any pension contribution paid by your company by the end of its financial year will reduce its tax bill. However, there is a tax rule that 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.
Bring forward expenses
If you intend to buy equipment next financial year, whether that’s a car, machinery or new computers for the office, by signing the purchase agreement by the end of the current financial year you can claim the tax deduction (capital allowances) a full year earlier.
Propose a bonus subject to approval of the accounts, this will reduce the corporation tax, while the PAYE and NI isn’t payable until the bonus is processed through the payroll. The net bonus can be left in the company. Write off unusable stock and revalue items you intend to sell at below cost. Bring forward the purchase of new equipment.