I hope the following ideas from our Mr Tax – Peter Clare may be of help to you. Peter stresses that these are just ideas and that they may not suit everybody. The important message is that you should plan carefully and make use of your accountant or the services of a specialist tax consultant.
(1) Can you incorporate?
For sole traders and partnerships tax is payable on account of the actual liability in two instalments. If you stop trading these payments will need to be revised downwards.
If you transfer the business to a company no further tax will be due from the unincorporated business once the final accounts have been submitted and the tax paid. The company will have to pay Corporation Tax. Before the company will have any tax to pay twelve months will pass and then there is a further nine months before the tax becomes payable. Depending on the level of profit and the amount of remuneration drawn the tax liability could be as much as fifty per cent lower and the timing delay will help your cash flow. The overall national insurance bill can also be reduced.
Do the figures and calculate the overall position before you act!
(2) Have you any overlap relief?
Every unincorporated business should ask their accountant to review the tax computations to see if there is any unrelieved overlap profit. This is profit that has been taxed twice due to the basis of assessment and if unlocked can be used to reduce the current tax payable. Your accountant will advise you but you will need to either cease trading or change your accounting period.
(3) Payments on account.
In a recession profits reduce and as tax payments on account are based on the profits of the previous period a reduction in profit will lead to a lower tax liability. You should get your accountant to revise the payments on account downwards.
(4) Have you subscribed for shares?
When the economy enters recession often companies fail. If you have subscribed for shares in a private company and lost money you can set the capital loss against income. This helps if you have no capital gain to set against the capital losses.
(5) Is there any expenditure you have not claimed?
You could be paying too much tax if you have not identified all your allowable expenditure, Together with your accountant review all expenditure and see if you can claim more than you have.
Examples would be a charge for using your home for whatever business duties you perform there. This could be record keeping, administration or the garage used for storage. On top of this do you launder towels, overalls etc? Then claim a reasonable laundry charge. Find out what you would have to pay commercially.
Can you benefit from paying family members wages or a bonus. They must be actually paid and commercially justified. It could be that no tax is payable by the recipient, there being allowances to cover, or it may be that the profit would have been chargeable at a higher rate.
Do the figures and calculate the overall position before you act!
Have you claimed for all the capital expenditure? The one that comes to mind is your home computer but are there other items of equipment you use in the business that you bought personally? What about the fixtures in your building; get your accountant to do a review.
It goes without saying that you should review expenditure to cut out waste.
This is another item you must consider with your accountant. To example this you claim for your accountant’s fees but at the accounting date and even at the time the accounts are prepared there is no bill. Work has been done and so a liability exists and so a charge against profit can be made. This is known as a provision.
Review your business are there any others? If you have a lease and there is a clause whereby you have to make good dilapidations you could provide for the likely cost if they can be accurately estimated.
Go over your debtors and where they are irrecoverable you can write them off, thus reducing profit.
(7) Can you defer income?
If income is not included in the accounts it cannot be taxed. I appreciate you need all the income you can get your hands on but can you defer any? Deferring income from one accounting year to the next will delay the tax payable by twelve months. Again this has to be done with the help of your accountant.
If a sale has been made it must be included, work in progress must also be included but what I have in mind is whether the actual sale can be deferred. If it is a large sale and the customer agrees then this ploy will work.
(8) Can you have more than one trading entity?
This is another idea that needs careful planning with your accountant. HM Customs & Excise do not permit trade splitting. An example would be a public house where the food is run as a separate trade.
The good news is that if you try something like this, the rejoining of the two entities for VAT can only take place when the VAT officer has issued a notice. It may be that the total income of the two entitles is below the threshold of £70,000 in which case life is easier.
There is nothing in the law that stops you having more than one trading entity so long as everything is done correctly and the paperwork records that position. So you could have a company running along side your sole trader or partnership business and as explained above that gives a delay in the payment of tax. Also if you do not withdraw all the profits from the company there could be substantial savings if you pay tax at 40%.
(9) Capital expenditure.
Cash flow is often as important as profit.
With the new 100% capital allowances you should ensure that if you are going to incur expenditure you do not delay the purchase into the next accounting period but incur it before the end of the accounting period to get the benefit of the tax reduction one year earlier.
You may be able to affect a cash flow advantage by making a purchase, getting the tax relief but deferring the payment for the purchase by having a loan for as long a repayment period as possible.
Why not replace your car with a van? The VAT on a van is recoverable whereas it is not on a car. Also the benefit in kind rules are also more favourable on vans.
(10) Company profits.
Be careful when you form another company if you already have one as this leads to the small company rate being halved with a possible increase in the corporation tax payable.
Review the way you withdraw profit. Make sure the salary is only large enough to pay national insurance as any more is a waste of money.
If you have a positive balance on your loan account the company should pay you the going rate of interest as this profit withdrawal does not attract national insurance. Likewise the company could pay rent if you own the property or assets used by the company for trading. Again, be careful as you could destroy your entitlement to Entrepreneurs’ relief.
Disclaimer: this information has been honestly written with a view to helping you but I am, like most people, not perfect and I apologise for any inaccuracies. I cannot be held responsible for any consequences of you using the information unless I have been made aware of the full facts of the matter and have expressed an opinion thereon.
To find out more about Peter Clare and Mr Tax, visit their feature on bestofhinckley. Alternatively, you can contact Peter Clare directly on 07977 922 048.