Genevieve Morris highlights some of the actions business owners may want to consider to optimise their company’s Corporation Tax position.
1 Get on top of tax compliance
Tax compliance can often be left to the last moment, with clients (and advisors) scrabbling to file the tax return at the last moment in order to avoid penalties. For a 31 December year-end company that means finalising it over Christmas.
By prioritising tax compliance you are more likely to have time to consider beneficial claims and elections that the company can make, maximise reliefs available such as Research & Development and Land Remediation Relief, and have far better visibility on upcoming tax payments.
Many beneficial claims and elections (such as relief for losses) can be made for up to two years following the end of the accounting period, so early completion of the current year compliance obligations provides an opportunity to also review the prior year claims and elections and see if more tax efficient elections can be made.
The other benefit of prioritising tax compliance is that less time elapses between a transaction occurring and the need to report it, generally meaning less time is spent looking through historical records, and more accurate reporting.
2 Utilise tax losses
If you are likely to make tax losses in your current period, and you were profit-making in the prior period, you may want to consider shortening your current accounting period in order to access the losses sooner. Losses carried back to a prior profit-making period can generate an immediate cash tax refund.
However, with the prospect of higher Corporation Tax rates from April 2023, you should also consider if priority should instead be given to sheltering future profits from tax at the higher rates by carrying losses forward, rather than carrying back.
3 Review your stock and bad debt provisions
Provisions which are calculated on a specific basis and comply with accounting standards are generally deductible for Corporation Tax purposes. Business owners should critically review their stock value and bad debts and decide whether it is prudent to include a provision in the current period. As long as the provision is calculated on a specific basis, a tax deduction will be available. This would either reduce current year taxable profits, and therefore the current year Corporation Tax liabilities or may create a loss in the current period which could then be carried back by the business or carried forward and set against future profit.
4 Bonuses, holiday pay accruals and pensions
Accruals made at the year-end for bonuses and holiday pay are tax deductible provided they are ‘paid’ within 9 months and 1 day of the year end, or crucially before the tax return is submitted if this is sooner.
However, employer contributions to pension funds must be paid before the company year-end date, as relief is only available on a paid basis. Tax relief for unpaid pension contributions are therefore delayed by 12 months.
5 Maximise your capital allowances
Generous tax relief is available for qualifying capital expenditure.
For companies, the benefit of the super deductions of either 50% or 130% for expenditure incurred between 1 April 2021 and 31 March 2023 may be available, and you should consider what expenditure could be accelerated into this period in order to claim the extra tax relief.
Additionally, there is the Annual Investment Allowance set at £1m (that the Government intends to be permanent), which provides 100% tax relief for qualifying capital expenditure in the year it is incurred.
It is also possible to review historical expenditure where capital allowances have not been claimed. Provided the asset is still owned relief can be claimed in the current year for writing down allowances at 18% or 6% depending on the class of the asset.
Companies should retain accurate records of capital expenditure, particularly related to refurbishments or fit-outs, where a detailed schedule of work is usually required in order to maximise the capital allowances claims.
Would you like to know more?
If you would like to find out more about the above, please get in touch with your usual Blick Rothenberg contact or Genevieve Morris or Neil Insull using the details on this page. Entrepreneurs Hub here.