Each year, all companies should take action before their year end to make sure they satisfy requirements for some of the tax reliefs to which they are entitled. Many companies have calendar years or 31 March year ends making this a topical issue.
Whilst the tax treatment of most income and expenses follows the way they are dealt with in the company’s accounts, the actual date on which a cash transaction took place will affect the tax outcome for some. The most common are:
- Pension contributions – the amount a company pays as its employer contribution is considered for tax deduction in the year it is paid. However any company that proposes making a much larger contribution than the amount paid the previous year should check that it will not breach the limit for immediate tax relief.
- Sales of capital assets – the date of disposal of items such as plant, buildings or shares determines the year in which the event is taxed. Depending on the company’s overall tax profile, there may be an advantage in deferring or accelerating the date of disposal. Of course, if the disposal will be tax exempt, the timing is irrelevant.
- Purchase of plant and machinery – for capital allowances the expenditure is broadly treated as incurred for capital allowances purposes when the obligation to incur the expenditure becomes unconditional. However, the general presumption that there is an advantage in making the purchase before the year end (in order to accelerate capital allowances) has been turned on its head following the recent Autumn Statement. For many companies and groups in next year and 2014, most of their expenditure (other than on excluded items such as cars) will qualify for immediate tax write off because the annual investment allowance (AIA) limit will increase from £25k to £250k from 1 January 2013. Our advice now to companies that generally do not spend as much as £250k in a year is to delay expenditure until 2013 to benefit from the much increased limit. Companies with a 31 March 2013 year end will only have a partial benefit of this new higher limit this year, and should be wary of simply assuming post 1 January 2013 spend will be covered by the enhanced AIA.
Another pre-year end action is to look back two years for tax claims and elections – it is more than mere housekeeping as a careful review of the options taken for tax relief should be reviewed in the light of what happened in the following years and what’s now expected in the future. Judicious revision of claims can, for example, reallocate tax reliefs to a member of the group more likely to use them.
Our experience in advising groups has shown that the areas we highlight above are the main areas that can improve a company’s tax profile. As each group will have its own unique circumstances, other opportunities may be available and in any event it is important to tailor any proposed actions to the particular circumstances of the group.
If you would like more information, please contact Richard Service