As the financial year-end approaches, smaller businesses should be planning to save tax
Many business owners could save tax, both personally and for their business, with a little careful planning. The financial year-end or the business year-end is the best time for such a review. This article suggests some key areas for those in the building industry to consider.Consider buying assets before the business year-end to accelerate capital allowances
Remember that 100% relief is now available on purchases of IT equipment and energy-saving technology for small businesses.
Beware of increases in stamp duty
Try to complete property purchases and share transfers (especially where the shares are in a property company) before the budget, in case stamp duty rates increase.
Sale of business assets
Timing can make a big difference here. From 6 April, the profit arising on the sale of assets attracting "business asset taper relief" may be taxed at 10% where the asset has been held for just two complete tax years. Examples of qualifying assets include shares in an employer's company, shares in a privately owned non-investment company, or land or property for non-investment. But there are grey areas, and a restructuring of business assets is sometimes necessary to ensure the minimum tax charge. It's best to seek professional advice.
Transfers to lower earning spouse
Consider transferring shareholdings to your spouse if he/she pays tax at a lower rate. Also think carefully about when dividends for owner-managed companies are paid to ensure that the lower rate tax band is optimised. For example, if your spouse is nearing the upper limit of their tax band in the current tax year, it may be better to postpone the payment to the next financial year. Collect outstanding debts
Tax is payable on debtors, even if the money has not been recovered by the firm's year-end.
Work in progress
Identify items which can be billed. Remember partner time and profit are excluded from work in progress, therefore it may be beneficial in some circumstances to defer billing until after the practice year-end. Consider issuing bills where possible before the year-end to accelerate debt recovery and facilitate cash flow or to improve the reported profitability in the accounts. Owner-managers and directors
As owner-managers can be paid in a mix of dividends, bonuses, salary, pension and a host of other benefits, this can be varied to create a tax-efficient package. Remember, dividends are not liable to National Insurance although this can potentially reduce the availability of pension relief, so take care.
Employees
The year-end is also a good time to review remuneration packages for employees, to take into consideration legislation providing new or revised tax incentives.
Bonuses
Consider the timing of bonuses. You may be able to accelerate tax relief (that is, get the relief in this financial year even if the bonus is not paid for nine months later). Going green can save money
From 6 April, cars with greater exhaust emissions will generally be taxed more heavily.
Change to a privately owned car
Buy the car yourself and charge business mileage to the company within the tax-free rates approved by the Inland Revenue. Any reimbursement is non-taxable as long as it falls within the approved rates. However, do remember to keep a log of your business miles.
Contribute to cost of company car
If you make a capital contribution up to £5000 towards your car, this may reduce your personal tax bill.
Calculate business miles
The key thresholds are 2500 and 18,000 business miles for 2001/2002, so plan further business trips before 5 April – if appropriate – to maximise the tax-free reimbursement. From 6 April, there is no relief for higher business miles, nor the age of the car. It's generally worth reimbursing the firm for fuel used for private journeys. If a director or employee needs to work abroad for more than a year full-time, consider sending him/her overseas before 6 April to secure non-residence for a complete tax year.
Purchase and sale of business assets
Remember that 100% relief is now available on purchases of IT equipment and energy-saving technology for small businesses.
Try to complete property purchases and share transfers (especially where the shares are in a property company) before the budget, in case stamp duty rates increase.
Timing can make a big difference here. From 6 April, the profit arising on the sale of assets attracting "business asset taper relief" may be taxed at 10% where the asset has been held for just two complete tax years. Examples of qualifying assets include shares in an employer's company, shares in a privately owned non-investment company, or land or property for non-investment. But there are grey areas, and a restructuring of business assets is sometimes necessary to ensure the minimum tax charge. It's best to seek professional advice.
Consider transferring shareholdings to your spouse if he/she pays tax at a lower rate. Also think carefully about when dividends for owner-managed companies are paid to ensure that the lower rate tax band is optimised. For example, if your spouse is nearing the upper limit of their tax band in the current tax year, it may be better to postpone the payment to the next financial year.
Debtors and work in progress
Tax is payable on debtors, even if the money has not been recovered by the firm's year-end.
Identify items which can be billed. Remember partner time and profit are excluded from work in progress, therefore it may be beneficial in some circumstances to defer billing until after the practice year-end. Consider issuing bills where possible before the year-end to accelerate debt recovery and facilitate cash flow or to improve the reported profitability in the accounts.
Structure reward packages to reduce tax
As owner-managers can be paid in a mix of dividends, bonuses, salary, pension and a host of other benefits, this can be varied to create a tax-efficient package. Remember, dividends are not liable to National Insurance although this can potentially reduce the availability of pension relief, so take care.
The year-end is also a good time to review remuneration packages for employees, to take into consideration legislation providing new or revised tax incentives.
Consider the timing of bonuses. You may be able to accelerate tax relief (that is, get the relief in this financial year even if the bonus is not paid for nine months later).
Cut tax costs of company cars
From 6 April, cars with greater exhaust emissions will generally be taxed more heavily.
Buy the car yourself and charge business mileage to the company within the tax-free rates approved by the Inland Revenue. Any reimbursement is non-taxable as long as it falls within the approved rates. However, do remember to keep a log of your business miles.
If you make a capital contribution up to £5000 towards your car, this may reduce your personal tax bill.
The key thresholds are 2500 and 18,000 business miles for 2001/2002, so plan further business trips before 5 April – if appropriate – to maximise the tax-free reimbursement. From 6 April, there is no relief for higher business miles, nor the age of the car. It's generally worth reimbursing the firm for fuel used for private journeys.
Working abroad: go before 6 April
Postscript
A more detailed year-end tax planning checklist is available from: www.smith.williamson.co.uk.
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