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Year End Planning

12 June 2009 No Comment

How can I reduce my tax bill?

A few weeks before the end of your business trading year there are a number of measures which you may want to consider, to help minimise your tax liability.

Whilst these measure are intended to help reduce or postpone profits (and therefore taxes) you still need to bear in mind whether this is appropriate commercially. For example, if you are going to talk to the bank about a loan, then you may want to increase profits as opposed to reduce them! The point of this check list is to encourage you to think about planning issues in advance of the year end. You may want to ask for further advice about any specific issues.

In order to make the accounts look good and minimise any tax liability, you may want to consider:

  • Chasing any debtors in order to get payments into the bank account now. A good bank balance on the year end date will help.
  • Consider how much money you have taken out of the company. Ignore salary and reimbursed expenses for the moment, and just think about additional drawings. If the additional drawings exceed your profit forecast, then you might have taken out too much. The Revenue can charge income tax on a personal “benefit in kind” if your company is providing you with (what is in effect) an interest free overdraft. If this is likely to be a problem, you may want to consider injecting some cash into the company bank account before the year end date. The important thing is to have a healthy balance sheet on the year end date.
  • Delay issuing invoices to clients which would ordinarily be prepared in the final month of the year. Leave that a short while and consider issuing them in the first month of the next trading year. Depending on the accounting treatment, that may put potential taxable profit into the later trading year and delay the tax liability for a further twelve months.
  • Ensure that you, and any of your staff, prepare expense claim forms for all expenses incurred by the end of this trading year.
  • Bring forward any anticipated expenditure on major purchases. For example, if you were planning to buy a new computer early in the next trading year, buy it now (before the end of this trading year) so that tax relief can be claimed sooner. This can be beneficial, even with more mundane items of expenditure. If you are about to replenish anything, incur the expenditure now, before the year end! Each item on its own may not be much, but they soon add up and they make a difference.
  • If you sell goods as opposed to services, or if your business is a mix of goods and services, then you need to plan a stock take for the last day in the trading year. If you have stock, then a stock take is going to be easier if you aim to have as little stock as possible around the year end date. In any case, tax relief cannot be claimed for holding stock. Tax relief can only be claimed for stock which has been sold so there is no point holding onto any more stock than you really need to!
  • Look at the bad debts that have arisen during the year. If any of these debts are more than 6 months old, consider writing them off now and claiming bad debt relief. Prepare a further copy of the original invoice and (in red ink) write across it “Bad debt relief claimed” and write the date that you made the decision. Include any such invoices in the next set of book keeping papers. Make the decision before the year end date. In order to qualify for bad debt relief for both corporation tax and VAT, you must also write to the debtor stating that you consider the debt to be irrecoverable, and accordingly, you are claiming bad debt relief.
  • Consider any invoices that have been issued which may give rise to a credit note. To the extent that you can predict the need to raise a credit note, do it now before the year end.
  • Compare your own profit and loss forecast for this current year with the formal accounts for last year. Think along the lines of “are the motor costs this year in line with the motor costs last year”? Where expenses in the current year are significantly higher than the year before, you may need to be certain that the extra costs can be justified in the event of a tax office enquiry. Where expenses in the current year are significantly lower than the year before it might be the case that some expenses have been missed. Think about any expenses that might have been overlooked and which need to be put through the books.

The rules are contained at s445 CTA 2010 (formerly s419 ICTA1988).

This report follows on from the 300800 message!