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Save tax with our pre 6 April 2010 tax planning ideas
Whilst the country is officially out of recession, many individuals and businesses are still feeling the effects of the 18 month downturn. With the 31 January filing deadline passed, now is the ideal time to review your tax position to ensure you are paying no more tax than you need to.
These ideas are not exhaustive and are not covered in detail. To discuss your specific circumstances please contact your usual Hazlewoods contact or e-mail tax@hazlewoods.co.uk.
Choice of business structure
If you run your own business it may be worth reconsidering the structure of your business. The main choices are:
• Sole trader;
• Partnership;
• Limited Liability Partnership (LLP);
• Limited company
• Partnership and limited company
• LLP and company
Although you probably considered the tax efficiency of the structure of your business at the time you commenced trading, it may be worth revisiting the issue to check the structure is still the most beneficial for you. Any decision about the structure of your business will be complex and not purely tax related, therefore advice should be sought.
Year end date change
It may be a good time to look at the year end date of your business. Although any change will not reduce the amount of tax you pay over the life of the business it can delay the payment of tax or accelerate a repayment of tax and thus provide a significant cash flow advantage. A person may change their accounting year end at any stage but there are certain restrictions imposed by statute such as:
• the initial accounting period ending with the new accounting date must not exceed 18 months;
• the notification of the change in accounting date must be given in a tax return before 31 January following the tax year in which the change is made; and
• changes of accounting date are not permitted more than once in every 5 years unless HMRC are satisfied that the change is for general commercial reasons.
Withdrawing funds from the business
If your business is a company, significant tax could be saved by revisiting the way in which you withdraw funds from it. The basic choices are:
• salary/bonus;
• dividends;
• interest on directors’ loan account balances; and
• rent
The most tax efficient solution is usually a mixture of all four, if applicable, however to ensure tax is minimised the position should be reviewed annually. Any decision should consider all forms of tax and the interaction with pension planning.
IR35
IR35 may apply when you, as an individual, provide your services to a client through an intermediary. For example, if you set up a partnership or a limited company, your client contracts with the partnership or company rather than with you. This includes where your business contracts with an agency to supply your services to a client.
HMRC will seek to apply the IR35 rules where, if the partnership or limited company did not exist in this arrangement, your work for the client would appear to be one of direct employment.
If affected, you should consider drawing a bonus before 5 April 2010, and then give some thought to whether your contract terms are capable of being modified to avoid IR35 in the future. If not your year end should be 5 April.
Capital allowances
On 1 April 2010 the time limit by which businesses can make tax claims which previously had a six year time limit for companies, or a five year and ten month time limit for unincorporated businesses, drops to four years. In view of this change it may be worth reviewing capital allowance claims.
Ensure qualifying expenditure is incurred prior to 6 April 2010 to obtain the 40% temporary first year allowance.
Ensure you are making the most of the Annual Investment Allowance (AIA).
With effect from 1 April 2008 for companies and 6 April 2008 for other businesses an AIA was introduced of 100% of the first £50,000 of expenditure on plant and machinery (excluding cars). This is irrespective of the size or form of business, but there will be only one AIA per group. This replaced the first year allowances previously available to small and medium sized enterprises.
Generally where the investment exceeds the AIA threshold, a flat rate of 20% is applied to apportion the investment over subsequent years. So, if a firm buys £80,000 worth of new IT systems, it can allocate the first £50,000 of expenditure against the annual investment allowance and the remaining £30,000 would achieve tax relief at 20% a year on a reducing balance. This is a change from the previous rate of 25% for items that did not qualify for first year allowances.
There are also "special rates" which apply to certain qualifying expenditure such as ‘integral features’, for instance electrical or lighting systems, thermal insulation and long life assets. This expenditure will attract 10% allowances in the new special rate pool.
Where possible you should plan your business’s capital expenditure to ensure you obtain the maximum benefit from the AIA each year.
Short life asset (SLA) elections
The SLA legislation lets a business write off the cost of an asset over its life. It does this by putting the expenditure in a single asset pool and having a balancing adjustment when the asset is disposed of or scrapped, thus accelerating the capital allowances available.
An asset can be treated as a SLA if the business makes the relevant election (the actual or expected life of the asset is irrelevant), although some assets are specifically excluded from SLA treatment (e.g. cars and long life assets). If it turns out that the asset is not a short life asset the expenditure in the SLA pool is transferred to the main pool after four years.
Businesses should consider whether it is worth making any SLA elections, although the extra administrative burden of maintaining single asset pools should be taken into account.
Enhanced Capital Allowances (ECA) on energy saving equipment
ECA of 100% can be claimed on energy efficient and environmentally-beneficial plant and machinery. Budget 2008 added to the list of qualifying plant and machinery, therefore if your business is making such investment you should review the list to see if you can benefit from the regime. Further information and details of qualifying expenditure can be found at www.eca.gov.uk/etl.
Loss making companies can surrender ECAs for a 19% tax credit. The credit is however capped at the lower of the amount of PAYE/NIC paid by the company or £250,000.
Research and Development (R&D) tax credits
Both Finance Bill 2007 and 2008 contained measures to improve R&D tax relief for small or medium sized enterprise (SME) companies. However the changes could not be made immediately because they were subject to European Commission (EC) approval, as the scheme for SMEs is a notified State Aid.
The measures which came into force on 1 August 2008, include:
1. The enhanced tax deduction for qualifying R&D expenditure by an SME will be increased from 150% to 175%.
2. The rate at which R&D losses can be surrendered for cash reduced from 16% to 14%.
3. SMEs’ R&D expenditure in respect of payments to clinical trial volunteers is now eligible.
4. Companies have to be going concerns to be eligible for SME R&D relief.
5. There is a cap of €7.5m benefit per project for R&D expenditure incurred on or after 1 August 2008.
6. The definition of eligible R&D staffing expenditure has been expanded to include social security contributions payable under other European countries’ social security regimes.
Small business rate relief
It is thought that many businesses throughout the UK do not claim the business rate relief due to them and are therefore making unnecessary payments to the Exchequer. Make sure your business is not one of them, by checking if you are due any of the following reliefs:
- For the financial year from 1 April 2009 to 31 March 2010 empty properties in England with a rateable value of less than £15,000 will be exempt from business rates.
- Since 1 April 2008, empty business properties have been exempt from business rates for the first three months that they are empty. Industrial and warehouse properties qualify for a further three months' exemption from business rates.
- Charities and community amateur sports clubs can get their business rates bills reduced by 80%. In some areas, this could be reduced even further.
- Other non-profit organisations can apply for up to 100% discretionary relief.
- Certain rural businesses, such as village shops and petrol stations, may be able to claim rate relief.
- If your business is important to the local community you may be able to get hardship relief.
Consider transferring a company car to you personally
With the ever increasing tax charges on company cars and fuel benefit it may be worth transferring your company car to you personally. This may cause an increased tax charge in 2009/10 (if it is transferred to you at undervalue) but may be sensible planning overall. We have our own calculation software to help you.
Loans instead of bonuses
If your business is suffering from cash flow issues, instead of paying bonuses you could make loans at the year end to the individuals. The bonuses could then be paid anytime within nine months of the year end. There will be tax to pay on the benefit in kind on the loan, but this is likely to be small.
Loss claims
Three year loss carry back
Following the 2009 Budget, unincorporated businesses and companies are still able to carry back current year trading losses against profits of the previous three years. The original relief announced in November 2008 has been extended to cover trading losses for unincorporated businesses in both 2008/09 and 2009/10 and for companies with accounting periods ending between 24 November 2008 and 23 November 2010.
The amount of losses that can be carried back to the immediately preceding year is unlimited, however any carry back to the preceding two years is limited to £50,000.
Current year losses
If you know your business is going to make a loss in the current tax year you can make an in year claim to obtain a refund in respect of a prospective loss carry back claim to a previous year. If your claim is erroneous you may be charged interest and penalties.
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