Tax planning in a recession
We start the New Year with many business people wondering what 2009 will bring in terms of markets, finance and economic confidence.
One thing is for certain however, “Cash is King” and the successful business people will closely monitor income, expenditure and cash flow.
Tax is a large expense for both businesses and their owners and should not be ignored. Careful tax planning may make a significant difference to cash flow. Sharon Bedford and Jacqui Birks of James Cowper offer advice for businesses on tax planning in recession.
Reviewing tax payments due on 31 January 2009
In the main most people with tax due on 31 January 2009 may already find that they have settled their 2007/08 liability by making interim payments on 31 January 2008 and 31 July 2008. However, individuals now looking to make 2008/09 interim payments based on the tax they had to pay in 2007/08, may find the tax payable will be excessive. This is because their income on which they will pay tax in 2009 has reduced compared with that of the previous year on which the interim payments are based.
Where income is reducing, it is possible to make a claim to HM Revenue and Customs for the interim payments in January and July 2009 to be reduced. Such a claim can be made on the 2008 tax return (if still to be filed), or by applying on a form SA303.
It is important that any claim to reduce is as accurate as possible. In cases where the claim for reduced payments turns out to be excessive, interest will be charged on any additional tax payable from the original payment dates. It is unlikely that the actual amount payable will be determined until the 2009 tax return is completed.
Individuals also need to be aware that any tax due for the year ended 5 April 2008 and not paid by 28 February 2009 will be subject to a 5% surcharge, plus interest from 31 January 2009.
Overlap relief
For existing businesses with a year end other than 31 March or 5 April, and in particular those in existence in 1996/97 when self assessment was introduced, it may be a good time to consider a change of year end, maybe to one that either suits the trade better, or to bring it in line with the end of the tax year.
Broadly, profits of a trade should only be taxed once over the lifetime of a trade. If, because of the change in the basis taxation in 1996/97, there are profits that have been taxed twice, these are known as “overlap profits” and tax relief is available.
Some businesses may have “overlap profits” which were calculated at the time the profits were taxed twice. This information should be recorded on the individual’s personal tax return, if relevant.
Overlap profits are claimed as a deduction against profits either on a change of accounting date or cessation of the business. They can also create a loss which can be utilised against other income as outlined above.
Although there may be sizeable overlap profits, it may not always be beneficial to change the accounting date as the rules relating to how profits are taxed in these circumstances are complicated. However, where there is significant relief available and there are declining profits it is probably worth reviewing. Not least, because the monetary value of the relief is declining as time passes.
Claiming all the tax deductions you are entitled to
You should check that your business is claiming all the tax relief you are entitled to. For example, from April last year there has been a change in the way that tax relief is given for capital expenditure. A standalone business will be able to claim a full deduction for the first £50,000 of capital items in the year of expenditure. Special tax incentives also exist for capital expenditure on energy efficient “green” technologies and these should be explored.
Ensuring stock and Work in Progress is appropriately valued
In times of recession it may be that a more conservative valuation in the accounts of work in progress or stocks, as well as extra provisions for specific bad debts or credit notes is appropriate. A company may also need to review the accounts value of any intellectual property, including goodwill arising from the purchase, at the year end. All of these may reduce taxable profits and recognising them on a timely basis is likely to reduce a business’ tax payments.
Redundancy payments
It may be necessary to lose staff by redundancy. If redundancies are to occur around the business’ year end then we would recommend you review the tax rules to ensure a deduction for the costs is obtained in the earlier accounting period. A provision for redundancy payments made at the end of the accounting period should be deductible in that year provided the individuals have been identified before the year end, the provision is properly accounted for under UK accounting standards and the payments are made within 9 months of the business’ year end.
Make sure you get advice too relating to the payments to ensure that you fully understand the payroll tax implications of redundancies and other severance payments, such as compensation for loss of office.
Losses
If your business makes a loss then it should be possible for you to “carry back” the loss to obtain a refund of any tax paid for earlier periods. The period for which current trading losses from businesses can be carried back against previous profits has been extended from November. The normal one year entitlement has been extended to a period of three years, with losses being carried back against later years first.
The amount of losses that you can carry back to the preceding year is unlimited. After carrying back losses to the preceding year, a maximum of £50,000 of the balance of any losses remaining unused is then available for carry back to the earlier two years. This is a temporary measure for one year only but may be of help to some businesses. Any losses that are still remaining unused are carried forward to set against future profits of the same trade.
Normally loss relief isn’t available until the tax computations have been filed, but very occasionally the Revenue may allow you to delay tax payments on the production of draft accounts or management accounts. Make sure you talk to your accountant if you are in this position.
If you are trading as a sole trader or partnership and you are in the first years of the business, there is potential for losses incurred in the first four years of a new trade to be set against total income of the previous three tax years. In this situation the earliest of the three years is used first.
In the final year of trading it is possible to offset losses against other income in that final year, or it is possible for the loss to be carried back against trading profits of the previous three tax years, latest first.
Losses and investments
All investments should be reviewed at least annually. Those standing at a loss may be sold to realise a capital loss. The loss can then be utilised against any capital gains made in the same tax year or carried forward to offset against future capital gains. It is important to know that losses cannot be carried back and that there are special rules as to how losses can be utilised where the two parties are “connected”.
For shares which have become of negligible value, for example where the company has gone out of business, a capital loss may be claimed equal to the cost of the investment.
Where an investment has been made in an unquoted trading company, including those qualifying for relief under the Enterprise Investment Scheme (EIS), it may be possible for the loss arising to be claimed against income. This relief is especially valuable if there are no other capital gains to offset in the same tax year. Any loss claimed in this way may be relieved against income of the year of the loss, the previous year, or both. Any loss claim will be restricted by any income tax relief given under EIS.
A successful claim may result in an individual saving income tax at 40% against capital gains tax at 18%.
If you think that this may apply you should ask a professional adviser to review the position. You need to be aware that there are a number of conditions which must be met for relief to be available and there are time limits on making the claims.
VAT
For small businesses (with a VAT annual turnover of less than £1.35million) it may be worthwhile considering whether there are any advantages in adopting the cash accounting scheme for VAT purposes. This could be a benefit for businesses in the late payment of sales invoices resulted in VAT becoming payable to HM Revenue & Customs before the associated cash has been received.
If the cash accounting scheme is not used then it is still important to ensure all VAT bad debt relief is properly claimed in full once the debt becomes six months old.
Talk to the Revenue
If after all the planning you are still finding it difficult to make tax payments then make sure you speak to the Revenue and the tax office dealing with your affairs. Ignoring tax demands can cause serious problems. It is better to negotiate to try to agree a schedule of instalment payments that your business can manage.
Finally
That is a quick round up of some of the reliefs that are available to reduce your tax bill. It is always important to bear them in mind, particularly in recessionary times when incomes may be falling. For more information, please feel free to contact Sharon Bedford sbedford@jamescowper.co.uk or Jacqui Birks jbirks@jamescowper.co.uk or Tel: 01865 200500.
03.01.2009