Companies – Tax Saving Opportunities

Due to the ever-changing tax legislation and commercial factors affecting your company, it is advisable to carry out an annual review of your company’s tax position.

Pre-year-end tax planning is important as the current year’s results can normally be predicted with some accuracy and there is still enough time to carry out any appropriate action.

We outline below some areas where advance planning may produce tax savings.

Corporation tax

Advancing expenditure

Expenditure incurred before the company’s accounts year-end may reduce the current year’s tax liability.

In situations where expenditure is planned for early in the next accounting year, the decision to bring forward this expenditure by just a few weeks can advance the related tax relief by a full 12 months.

Examples of the type of expenditure to consider bringing forward include:

• building repairs and redecorating
• advertising and marketing campaigns
• redundancy and closure costs

Note that payments into company pension schemes are only allowable for tax purposes when they are actually made as opposed to when they are charged in the company’s accounts.

Capital allowances

Consideration should also be given to the timing of capital expenditure on which capital allowances are available to obtain the optimum reliefs.

Single companies irrespective of size can claim an Annual Investment Allowance (AIA) which provides 100% relief on expenditure on plant and machinery (excluding cars). The amount of AIA is currently set at £1,000,000.

Groups of companies have to share the allowance.

Expenditure on qualifying plant and machinery more than the AIA is eligible for writing down allowance (WDA) of 18%. Where the capital expenditure is incurred on integral features the WDA is 6%.

100% allowances on designated energy saving technologies continue to be available in addition to the AIA. Details can be found here.

A ‘Super Deduction’ tax relief temporarily increases relief for expenditure on certain items of qualifying plant and machinery incurred from 1st April 2021 up to 31st March 2023.

Companies can claim a Super Deduction providing allowances of 130% on most new (unused/not second hand) plant and machinery investments that would ordinarily qualify for 18% main rate writing down allowances.

They can also claim for a first-year allowance of 50% on most new plant and machinery investments that would ordinarily qualify for 6% special rate writing down allowances (items such as integral assets like hot and cold-water systems).

Although the Super Deduction can lead to tax savings, it’s also worth noting there are a few items which may mean the Super Deduction is less attractive than anticipated. In addition, exceptions apply, most notably cars are excluded from qualifying for this relief.

Any decisions about expenditure need to be based on your company’s circumstances and it is worth running some projections prior to making any significant capital expenditure.

Limited capital allowances are also available for investments in certain types of structures and buildings.

Trading losses

Companies incurring trading losses have three main options to consider in utilising these losses:

• they can be set against total profits of the same accounting period
• they can be carried back against total profits of the previous 12 months
• they can be carried forward against future trade profits only (if incurred before 1st April 2017) and against total profits (if incurred after 1st April 2017)

However, there is a restriction on the use of carry forward losses where a company’s or group’s profits are above £5 million. Any profits over £5 million arising on or after 1st April 2017 cannot be reduced by more than 50% by brought forward losses. Losses that have arisen at any time are subject to these restrictions.

Extracting profits

Directors/shareholders of family companies may wish to consider extracting profits in the form of dividends rather than as increased salaries or bonus payments.

This can lead to substantial savings in national insurance contributions (NICs).

It is important to note that company profits extracted as a dividend remain chargeable at the relevant corporation tax rate.

Dividends

From the company’s point of view, timing of payment is not critical, but from the individual shareholder’s perspective, timing can be an important issue. A dividend payment in excess of the Dividend Allowance, which is delayed until after the tax year ending on 5th April, may give the shareholder an extra year to pay any further tax due. The Dividend Allowance is £1,000 for 2023/24 and £500 for 2024/25.

The deferral of tax liabilities on the shareholder will be dependent on a number of factors. Please contact us for detailed advice.

Share transfers

There are many good reasons why a married couple or civil partners should consider equalising their income, where this is possible and practical.

For married couples and civil partners, it is sensible to consider sharing income by gifting some or all of any income producing assets, such as shares you own, to your spouse to save tax.

Before doing this, there are a number of legal and practical considerations which need to be taken into account. You should also be aware that for this to work, several conditions need to be satisfied.

Generally, your gift must be to your spouse or civil partner from whom you have not separated and be an unconditional gift. Professional advice should always be taken so your individual circumstances can be reviewed.

Loans to directors and shareholders

If a ‘close’ company (broadly, one controlled by its directors or by five or fewer shareholders) makes a loan to a shareholder, this can give rise to a tax liability for the company.

If the loan is not settled within nine months of the end of the accounting period, the company is required to make a payment, known as a ‘S455’ charge.

This ‘S455’ charge is 33.75% on the outstanding loan balance. The rates were 32.5% to April 2022 and 25% for loans made before 6th April 2016.

A loan to a director may also give rise to a tax liability for the director on the benefit of a loan provided at less than the market rate of interest.

Rates of tax

UK trading companies currently pay corporation tax at the main rate of 25% or small profits rate of 19% on their taxable profits.

For companies whose profits range between £50,000 and £250,000, they will pay tax at the main rate of 25%. This will be reduced by a marginal relief providing a gradual increase in the effective corporation tax rate.

The practical impact of this is that profits in the margin (falling between the upper and lower limits), will pay an effective rate of tax of 26.5%.

The thresholds are shared across associated companies so company owners with more than one company should seek advice before April 2023.

For accounting periods that straddle 31st March, corporation tax may be paid at a blended rate of 19% for part of the year and a different rate for the second part.

Corporation tax self-assessment

Under the self-assessment regime most companies must pay their tax liabilities nine months and one day after the year-end.

If your company’s profits for an accounting period are at an annual rate of more than £1.5 million, you must normally pay your corporation tax for that period electronically and in instalments.

If you have a profit of over £20 million, there are different rules you must follow.

Corporation tax returns must be submitted within 12 months of the year-end and are required to be submitted electronically. In cases of delay or inaccuracies, interest and penalties will be charged.

Capital gains

Companies are chargeable to corporation tax on their capital gains less allowable capital losses.

Indexation allowance

To counteract the effects of inflation inherent in the calculation of a capital gain, an indexation allowance is given. However, the allowance is not allowed to increase or create a capital loss. The indexation allowance is frozen at December 2017 for disposals on or after 1st January 2018. For disposals on or after this date, indexation allowance is only calculated to December 2017. Assets acquired from 1st January 2018 onwards will not be eligible for indexation allowance.

Planning of disposals

Consideration should be given to the timing of any chargeable disposals to ensure advantage is taken where possible of minimising the tax liability at the small profits rate rather than the full rate. This could be achieved (depending on the circumstances) by accelerating or delaying sales. The availability of losses or the feasibility of rollover relief (see below) should also be considered.

Purchase of new assets

It may be possible to avoid a capital gain being charged to tax if the sale proceeds are reinvested in a replacement asset.

The replacement asset must be acquired in the four-year period beginning one year before the disposal, and only certain trading tangible assets qualify for relief.

Research and development tax credits

Research and Development (R&D) reliefs support companies that work on innovative projects in science and technology.

The question to ask is have you been engaged in a project that seeks to achieve an advance in science or technology? An improvement to an existing product or process may be sufficient for a claim.

The relief can be lucrative and if you would like to discuss any expenditure you have made, or are planning to make, which you feel may qualify, we would be happy to review your project and check what tax savings may be available.

A restriction was introduced for accounting periods beginning on or after 1st April 2021 and there are some specific exemptions so we’d always recommend seeking professional advice, to help you determine what your company may claim.

How TaxAssist Accountants can help

Tax savings can only be achieved if an appropriate course of action is planned in advance. It is therefore vital that professional advice is sought at an early stage. We would welcome the chance to tailor a plan to your specific circumstances. Contact us on 0141 632 1863 or use our simple online enquiry form.

Date published 6 Dec 2022 | Last updated 10 Apr 2024

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.