Business tax planning

Tax planning for business owners could save you a considerable amount. We take a look at areas that could result in savings:

Choice of accounting date - sole traders and partnerships
More than one business?
Extracting profits from your company

Choice of accounting date - sole traders and partnerships

The choice of accounting date affects the delay between earning profits and paying tax on those profits. When profits are static this delay is not an issue, but when profits are rising this provides a useful cash flow benefit. However, it is worth noting that when profits are falling this can make tax payment difficult if business needs have eroded cash that might have been set aside to pay tax.

An accounting date early in the tax year is a benefit for a growing business, but current economic conditions mean that some businesses might benefit from a change in accounting date to ensure that lower profits come into charge earlier, reducing tax payments. Of course as profits rise again, this might not be attractive, and businesses are not permitted to change accounting date more than once every five years unless it is for genuine commercial reasons.

The accounting date of a company does not affect the interval before tax is due on the profits as corporation tax is always due for payment nine months after the end of the year, except by the very largest companies.

More than one business?

When you have several business interests it is important to be aware of the tax implications when setting them up. The structures that you put in place can affect the tax liabilities on the business profits. Points to note include:

When two companies are under common ownership, the small company limits for corporation tax are shared between them. This includes companies owned by partners and children, though from 6 April 2012 there is an exemption where there is no interdependence between the companies.

This makes it very much more likely that a successful business will pay the marginal rate of corporation tax (27.5 per cent for 2011/12) on profits. For example, although the limits are £300,000 for the small company rate, if there were three associated companies, each would only benefit from £100,000 of profits at the small company rate. Two of the companies might only make small profits of around £10,000 per annum, but the third successful company making £250,000 would suffer the higher rate of tax on £150,000 of those profits, in spite of the fact that between the three companies the £300,000 limit has not been exceeded.

Where related companies are sharing the limits in this way there is still no possibility of offsetting losses between them, so this could be viewed as the ‘worst case scenario'. Forming a small group of companies would at least allow the losses in one to be offset against profits in the others.

It is important that you consider the structure of your business interests on a regular basis to ensure that you have the best outcomes for your business and you.

Extracting profits from a company

Whether you are considering extraction of profits from a company on a tax year basis or aligned to the company year end, there are a number of issues that should be considered.

Salary
National Insurance contributions are expensive but salary can be deducted from taxable profits in the company, so if profits are taxed at the marginal small companies rate (currently 27.5%), there is very little difference between extracting profits by way of salary or dividend for higher rate taxpayers.

Bonuses
Where annual bonuses are payable, the bonus must be due and payable before the company year end, even if the specific amount has not been decided. This is necessary to benefit from tax relief against the profits of the period. The bonus must always be paid within nine months of the year end to secure the tax deduction in the company.

Dividends
These are subject to a lower rate of income tax than other sources of income, though this is mitigated by the company not being able to claim corporation tax relief. The main advantage of payment by dividend as against salary is that no national insurance is payable on dividends.

Benefits in kind
Some benefits in kind are still quite tax efficient, including the provision of a company mobile telephone and a car with low emissions. Such cars may also qualify for a 100% first year deduction for capital allowances.

Pension contributions
The same test applies to pension contributions for director shareholders as applies to the spouse of a shareholder/director. Provided the total salary package (ignoring dividends) is reasonable for the input of the director into the company, then all salary plus pension contribution should be allowed against profits for tax purposes. Remember that there is an annual limit on pension contributions, which is now just £50,000, though unused limits from the previous three tax years can be used. Contributions in excess of this will trigger a tax charge on the member.