Ravi Singh Basra a senior tax manager in our corporate tax team shares his top ten tax tips that companies should be considering as part of their year-end tax planning.
1. Should you pay a Christmas bonus?
If you are thinking about paying bonuses to staff, consider paying them before the year end so the amounts can be accrued for in the accounts. The bonus must also be actually paid within nine months of the year end to obtain a corporation tax deduction. If the bonus is not paid by that date, the corporation tax deduction will be deferred until the bonus is paid.
Bonuses and salaries are deductible for corporation tax purposes, although these are subject to employer’s and employees’ NICs.
2. Consider whether to pay a dividend
Instead of or as well as a bonus, you may want to pay a dividend to shareholders, if there are reserves available.
Dividends are paid out of post-tax profits of the company and are therefore not deductible for corporation tax purposes. However, they are not subject to employer or employee National Insurance Contributions (“NICs”) and despite the income tax rates on dividends increasing over recent years, they are still taxed at a lower rate than salary.
For most corporate shareholders, dividend income should fall to be exempt under the UK distribution exemption.
3. Pension contributions can be a good idea
Pension contributions are frequently overlooked as a tax efficient way to remunerate employees. A company which pays a pension contribution directly to an employee’s pension fund will be able to claim a corporation tax deduction for the amount and the employee is not taxed on the amount, nor is the contribution subject to employers or employees NICs. For the payment to be deductible for corporation tax purposes, it must be paid before the end of the accounting period, otherwise the tax deduction is deferred until the payment is made.
A company may wish to increase or accelerate pension contributions to maximise the corporation tax relief in a given period but should be aware that there are limits on the amount each individual can have added to their pension pot each year without triggering a tax charge. The amount is currently £40,000 p.a. but this is reduced if the employee earns over £150,000 p.a.
When very large pension contributions are made by a company, the corporation tax relief may also be spread over several years. Broadly this may apply where the contribution is more than 210% of the prior year contribution and the excess is more than £500,000.
4. Make use of capital allowances
For capital expenditure incurred from 1 April 2021 to 31 March 2023, a “super deduction” of 130% of the expenditure may be available. Separately (and particularly for long life assets) there is an Annual Investment Allowance (AIA).
The AIA provides a 100% tax deduction for qualifying capital expenditure in the year it is incurred. It is designed to support businesses with the cost of capital expenditure by matching the tax relief to the year in which the expenditure is incurred, rather than spreading the tax relief over the life of the asset. The allowance is currently set at £1,000,000 per year and this was extended until 31 March 2023 as part of the Autumn Budget 2021.
Prior to 1 January 2019, the AIA limit was £200,000.
The balance of capital spend will be tax deductible at a rate of either 18% or 6% each year as a capital allowance.
Where companies, or groups of companies, are controlled by the same person and are related to each other, they are entitled to a single AIA between them.
5. Maximise the tax benefit of any losses
Because of the pandemic, many businesses have suffered significant losses over the past couple of years.
Trading losses may be carried back for relief against profits of the previous 12 months. A temporary extension was introduced that applies to trading losses incurred in accounting periods ending between 1 April 2020 and 31 March 2022. This extension allows trading losses to be carried back for a period of three years rather than 12 months.
Trading losses of up to £2 million per year can be carried back under the extended loss carry back rules.
The precise mechanics of the rules depend on whether the claim is being made by a standalone company or by a company that is part of a group. Companies and their advisers should review any relevant periods affected by the extension and ensure that relief for the losses is maximised.
A claim for extended loss carry back should be considered in light of the proposed increase in the rate of corporation tax applicable from 1 April 2023 of 25% (currently 19%). Based on the maximum carry back of £2m per year, the difference in tax relief would be up to £120,000 per annum (£240,000 over two years).
Given the uncertain business climate, companies could consider initially making the claim for the extended loss carry-back and revisiting this before the window closes for amending their corporation tax returns.
6. Do not undervalue your Research and Development (“R&D”)
The UK has extremely generous tax reliefs for qualifying R&D expenditure and all but the very largest of businesses can benefit from a 230% tax deduction for R&D costs. A business which is loss making for tax purposes, after claiming the 230% tax deduction can surrender the loss to HM Revenue & Customs (“HMRC”) for an immediate cash refund of 14.5% of the loss, which is subject to a cap linked to the company’s total PAYE and NIC costs for accounting period.
Alternatively, the loss can be carried forward and set against future profits arising from the trade, providing tax relief at that point in the future at the tax rate prevailing at the time.
Large company R&D relief takes the form of a repayable development expenditure credit (“RDEC”) which is 13% (for expenditure on or after 1 April 2020) of qualifying expenditure. RDEC is a taxable credit which can be used to discharge a company’s liability to corporation tax.
As announced at Autumn Budget 21, R&D tax reliefs will be reformed to support modern research methods by expanding qualifying expenditure to include data and cloud costs, to more effectively capture the benefits of R&D funded by the reliefs through refocusing support towards innovation in the UK, and to target abuse and improve compliance. These changes will be legislated for in Finance Bill 2022-23 and take effect from April 2023.
7. Watch out for Corporate Interest Restriction (“CIR”)
For a UK company or group, there are interest limitation rules that can restrict the amount of tax relief available for interest and finance costs.
When introduced in April 2017, the rules were aimed at highly leveraged large multi-national groups, however, these have inadvertently caught many standalone companies.
The aim of the rules is to restrict a company’s or group’s deductions for interest expense and other financing costs to an amount which is commensurate with its taxable activities within the UK, taking account how much the company or group borrows from third parties.
The CIR rules essentially limit the amount of net tax interest costs (applying UK tax principles) a company or group can deduct from its taxable profits if these exceed £2m per annum
For all UK companies and groups, a calculation should be performed each year to confirm that the net tax interest expense is below the £2m threshold. As this calculation is based on UK tax principles, this requires a more in-depth analysis than simply using the figures from financial statements.
Where net tax interest costs exceed the de-minimis and a restriction is expected to apply, there are certain compliance aspects that need to be met including notifying HMRC of the appointment of reporting company and submission of a CIR return.
Disallowed interest is carried forward and available for reactivation (tax deductible) in a future period if there is excess interest capacity.
If interest deductions are not restricted, it may still be beneficial to appoint a reporting company and submit an abbreviated annual return, as this may allow the carry forward of certain allowances
8. Should you update your Transfer Pricing documentation?
The UK transfer pricing rules require an adjustment of profits where a transaction between connected parties is not undertaken on an arm’s length basis and has created a potential UK tax advantage.
The UK transfer pricing rules do not impose a separate tax return requirement on taxpayers. Instead, the general self-assessment rules require that taxpayers keep sufficient records to enable them to make a correct and complete return.
There is an exemption for smaller companies (“SMEs”), however for non- SME companies and groups, it is recommended that documentation is maintained in the format prescribed by the OECD. This would include:
- A Masterfile containing standardised information relevant to all the MNE group members
- A local file which documents material transactions of the local taxpayer, and
- A country-by-country report (CbcR) containing information relating to the global allocation of the MNE’s income and taxes (applicable to groups with consolidated group revenue of €750 million)
Companies should ensure that their corporation tax returns reflect transfer pricing arrangements that satisfy the arm’s length principle and comply with UK transfer pricing rules.
HMRC do not currently require that transfer pricing documentation is filed, however, this can be requested at any-time. It is currently proposed that for large multinational enterprises within the CbcR regime that HMRC could request a business to produce a copy of their Masterfile and local files supporting their transfer pricing position within 30 days.
9. Don’t forget to pay your tax
Small companies are required to pay their corporation tax nine months and one day after the end of their chargeable accounting period.
For large companies and very large companies, the companies may be required to pay their corporation tax in instalments (“QIPS”).
A large company is one whose ‘profits’, in an annual accounting period, exceed £1.5m (this threshold is divided by the number of associated companies). This threshold is increased in the first year that a company is large to facilitate the transition to QIPS.
Very large companies are required to pay corporation tax by instalments four months earlier than large companies. This means that the tax liability of very large companies will be settled during the accounting period, rather than part-during and part-after the end of the accounting period as is the case for large companies.
A company is a very large company in an accounting period if its taxable profits in the period exceed £20m. This figure is reduced proportionately for accounting periods which are less than 12 months.
Companies should ensure that processes are in place to calculate and manage their tax payments effectively. For large groups, consideration should be given to putting in place a group payment arrangement (GPA) to help with administration. Each individual company is usually responsible for the payment of its own corporation tax liability; however, a GPA allows companies that are part of the same group to nominate a group company to make payments on behalf of the group. The company that makes all the payments of corporation tax on behalf of the group is called the ‘nominated company’ and effectively acts as the group bank for the participating companies.
10. Be compliant
Not a tax tip, but simply an easy way that a business and the owners can make savings – be compliant with the company filing and payment dates. Interest will be charged on tax underpaid, and penalties will be levied when returns are not filed on time. The later the return is, the higher the penalty will be.
There are a number of company filing and payment deadlines, and it can be difficult for a business to keep track of all of these, especially if the knowledge is all retained in the head of one key employee. Every business should have a tax calendar detailing the key payment and filing deadlines for the business and owners throughout the year.
Good housekeeping and not missing payment dates or filing deadlines is also going to improve a business’s risk rating with HMRC, making tax enquiries less likely, which in turn will save on management time and professional fees responding to these.
Would you like to know more?
If you would like to discuss the above or how it may affect you and your business, please get in touch with Ravi Singh or contact us using the form below: