Whilst the end of the tax year on 5th April 2013 does not always tie in with the year end of the company, several tax planning opportunities are available which can be put in place prior to the end of the company’s accounts year. Reviewing your Company tax position prior to the year end provides an opportunity to ensure that the eventual tax liability is no higher than necessary.
Extracting profits from a company
Whether you are considering extracting the profits from a company on a tax year basis or aligned to the company year end there are a number of issues that should be considered.
There is much debate on the best way to distribute additional profits within a company to director/shareholders after the payment of their basic salary and benefits.
Voting a bonus to a director before the company year end will reduce the taxable profits of the company for the year, reducing the corporation tax liability provided the bonus is paid within 9 months of the year end.
Bonuses are subject to both employee and employer national insurance and taxed on the director at their marginal rates of tax.
Dividends are subject to a lower rate of income tax than a bonus.
Dividends are not an allowable expense for corporation tax purposes and as such the company does not benefit from any corporation tax reduction in respect of the dividend payment.
The main advantage of payment by dividend as opposed to bonus is that no national insurance is payable on dividends.
For a dividend to be recognised in the tax year, it must have been paid or clearly demonstrated that it has been transferred to a director’s loan account pre-year end.
A pension contribution made on behalf of the director prior to the end of the tax year will reduce the company’s corporation tax liability.
As a pension contribution is not a benefit in kind for the director, this contribution does not attract any tax or NI for the director or the company.
Remember that there is an annual limit on pension contributions, currently £50,000, though unused limits from the previous 3 years can be used.
Contributions in excess of this limit will trigger a tax charge on the director.
Interest on credit loan accounts
If a director has a loan account within the company, consider paying interest on the balance.
This will attract tax for the director at their marginal rate of tax but not incur any NI for either the director or company.
The interest payment is an allowable expense for the company, reducing the corporation tax liability.
If the property the company trades from is owned by the director or their pension fund, ensure that market rent is being paid.
Family members remuneration
If members of your family work within your business, ensure that they are remunerated correctly for their role.
This can include a mixture of salary, bonus and pension contributions.
Timing of new contracts
With the drop in top rate corporation tax from 24% to 23% with effect from 1 April 2013, carefully consider the timing of new contracts to ensure that you are paying the correct level of Corporation Tax.
Timing of fixed asset purchases and improvements
The drop in the top rate of corporation tax and the increase in the annual investment allowance (from £25,000 to £250,000) in January 2013 need to be considered when assessing the timing of purchasing new fixed assets and improvements required by the company.
More than one business?
It is important to note when two or more companies are under common ownership, the small companies limits for corporation tax are shared between them.
This can result in one company being subject to higher rates of corporation tax whilst the other is subject to lower rates.
When related companies are sharing the limits, there is no possibility of offsetting losses between them unless they were set up as a small group.
It is also important that you consider the structure of your business interests on a regular basis to ensure the best outcomes for the businesses.
Cross charges between associated companies
Ensure that transactions between associated companies are on a commercial basis to be certain that each company is paying the correct rate of Corporation Tax.
Shareholding ownership to be structured tax efficiently
If the company is owned by multiple shareholders, ensure that they are structured accordingly to benefit from the capital gains tax and inheritance tax reliefs.
Hopefully, this is a useful overview of the tax planning opportunities available to you before the end of your accounts year. If you would like any further advice or would like to discuss your options in more detail, please contact Karen Robinson (firstname.lastname@example.org).