Tax Saving Opportunities for Companies

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 the payments 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.

From 1 April 2008, single companies irrespective of size are able to claim an annual investment allowance of £50,000, which will provide 100% relief on expenditure on plant and machinery (excluding cars). Groups of companies have to share the allowance. The 100% allowances on designated energy saving technologies continue to be available in addition to the annual Investment allowance. Details can be found at www.eca.gov.uk.
Limited allowances are also available for investments in certain types of building.

Trading losses
Companies incurring tax losses have three main options to consider in utilising these losses: 
 - they can be set against any other income (for example bank interest) or capital gains arising in the current year
 - they can be carried back for up to one year and set against total profits *See below
 - they can be carried forward and set against trading profits arising in future years.
* Pre-Budget report changes

A proposed revision will apply for one year. This will extend the carry back period for trading losses to a period of three years with losses being carried back against later years first.
The amount of trading losses that can be carried back to the preceding year remains unlimited. After carry back to the preceding year, a maximum of £50,000 of the balance of unused trading losses is then available for carry back to the earlier two years.

The measure will have effect for trading losses arising in company accounting periods ending in the period 24 November 2008 to 23 November 2009. Where the loss making period is less than a year the amount available for carry back to the earlier two years of £50,000 will be reduced pro rata.

HMRC will make repayments arising from loss relief claims received under the new rules on or after Budget Day 2009.

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.
Note however that company profits extracted as a dividend remain chargeable to corporation tax at a minimum of 21% from 1 April 2008.

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. If the shareholder is a higher rate taxpayer, a dividend payment which is delayed until after the tax year ending on 5 April may give the shareholder an extra year to pay any further tax due.
The deferral of tax liabilities on the shareholder will be dependent on a number of factors. Please contact us for detailed advice.

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 equal to 25% of the loan to HMRC. The money is not repaid to the company until nine months after the end of the accounting period in which the loan is repaid by the shareholder.

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
For the 2009 financial year:
 - If annual taxable profits do not exceed £300,000, they are charged at the small company rate of 21%.
 - If the profits exceed £1,500,000, the full rate of 28% applies.
 - If profits fall between these limits, marginal relief is given. All the profits are charged to tax at a rate between 21% and 28%.

Forthcoming changes
The small company rate was expected to increase to 22% from 1 April 2009 but the Pre-Budget report states that this increase will be deferred until 1 April 2010.

Self assessment
Under the self assessment regime most companies must pay their tax liabilities nine months and one day after the year end.
Companies which pay (or expect to pay) tax at the main rate (28%) are required to pay tax under the quarterly accounting system. If you require any further information on the quarterly accounting system, we have a factsheet which summarises the system.
Corporation tax returns must be submitted within twelve months after the year end. 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
In order 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.

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 small companies rate (currently 21%) rather than full rate (currently 28%). This could be achieved depending on 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.

How We 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. Please contact us if you would like more information.



For information of users: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.