Tel: 0113 418 2058 Mob:07794734711

BUSINESS OWNERS - TAX PLANNING

Accounting Date - Making the Right Choices

The time between when profits are earned and when the relevant tax is paid is affected by the choice of accounting date. If your profits are at a similar level each year then there is no issue. If profits are rising there is a benefit for cash flow but the reverse is true if your profits are falling.
Sole traders and partnerships that are growing benefit from having an accounting date early in the tax year, as this extends the period between charge to tax and the actual payment date. However if profits are falling it might be beneficial to change the accounting date to bring lower profits into charge earlier thus reducing tax payments. Bear in mind that once profits start to rise again this may not be as attractive. Businesses that are not incorporated can only change their accounting date once every five years, unless there are genuine business reasons.
Generally companies do not benefit from this process as their tax is always payable 9 months from their year end. If your profits are very seasonal it may be advantageous to make a change, similar rules on change of accounting date apply.

Planning for Multiple Businesses

If you are planning to have multiple businesses/ business interests you need to make sure you are aware of the consequences for tax of the structures you choose.
If you have 2 or more companies with common ownership (including those owned by children and partners), then for corporation tax the small companies tax band is divided by the number of associated companies. From 6 April 2012 there is one concession, if the companies owned by partners or children are not for commercial purposes subtantially inter-reliant then they will not be treated as associated.
Often where there are a number of associated companies there will be a more successsful business that will pay coporation tax at the marinal rate of 23.75% (2013/14). The small profits limit is currently £300,000, so if there were say 3 associated companies each company would would have a small companies profit limit of £100,000. If two of the companies had profits of £50,000 and the third profits of £200,000 then £100,000 would be taxable at the higher rate of corporation tax, regardless of the fact that overall small companies limit of £300,000 has not been exceeded.
If the companies above are not part of a group then any losses cannot be offset between them, forming a small group would allow this happen.

Need help with your accountancy requirements, please visit our accountancy page or want to know more about us go to About Our Company.

Profit Extraction -Companies

There are a number of options available for profit extraction wheteher it's on a company year end or based on HMRC tax year.
Salary - The issue with taking salaries is that you incur costly National Insurance Contributions, the employer proportion is off course deductable for Corporation Tax (CT) purposes but if you are a higher rate tax payer and paying CT at the marginal rate (currently 23.75%) the difference is not significant. Genreally dividends are the most effective route.
Bonuses - If you pay annual bonuses , these need to be due and be payable at the company's year end, you have up to nine months after the year end to make the actual payment and still qualify for the tax deduction for CT.
Dividends - These are not subject to National Insurance and are taxed to income tax at a lower rate. There are not allowable for CT and you must have sufficient retained profits out of which to pay them.
Benefits In Kind - There are some BIK's that remain quite tax efficient, in particular providing company mobiles and cars with low emission values. These vehicles may qualify for 100% FYA (First Year Allowance) against corporation tax.
Pension Contributions - The same rules apply to director shareholders/ their spouses, the salary/ package must be commenserate with with the work done. If this is the case then the salary package including pensions contributions will be an allowable CT deduction. The limit on pension contributions for 2013-14 is £50,000, anything in excess of this limit will result in a tax charge on the individual.