Expenditure incurred before the company year-end might reduce the current year's tax liability instead of next year's. Bringing forward expenditure by even a few weeks on, for example, building repairs, advertising, sales and marketing campaigns, and any other item deductible from profits can accelerate the tax relief by 12 months.
Investment in plant and equipment (but not cars) attracts an allowance of up to 100% of the cost, up to £1m. This allowance applies for qualifying capital expenditure incurred from 1 January 2019 to 31 December 2020.
The allowance relates to a full 12-month period, and is reduced proportionately for short accounting periods. Transitional rules apply to reduce the annual investment allowance for chargeable periods spanning these dates.
The allowance is only available once for a group of companies, but where companies are under common control of one or more individuals, multiple allowances will be available unless the companies also occupy the same premises or carry on the same type of business. The allowance is not available to partnerships with limited company members.
There is a further allowance, called the writing down allowance. This allowance is 18% and is applied to the unrelieved expenditure brought forward. Note that the writing-down allowance is calculated on the tax written down value. There is a lower rate of 6% available which applies to assets with a useful life of 25 years or more, and to integral features in buildings such as lighting and power supply and cars with an emissions rating of more than 110g/km CO2.
Spending money on electric car charging points, new and unused low CO2 emission cars (up to 50 g/km) and zero-emission vehicles including electric vans attracts a 100% first-year allowance, over and above the annual investment allowance.
Hire purchase and lease purchase
Hire purchase and lease purchase may provide a useful method of financing the purchase of an asset. Plant and equipment purchased on hire purchase will qualify for writing down allowance on the full purchase price, even if the company has paid only the deposit.
Specific provisions against bad debts or stock are allowable for tax purposes, but general provisions against stock writedown are not. For companies a general bad debt provision may now attract tax relief as a result of recent changes.
Bonuses to directors and staff
A proper provision may be made in the annual accounts for specific bonuses paid up to nine months after the year end. Take care to ensure that these are charged to PAYE and NI as appropriate, and that the staff become entitled to the bonus before the year end. You may need to make a board minute to record that entitlement.
Capital gains are taxed at the effective rate of corporation tax. Gains are calculated after deducting from the sale proceeds the market value at March 1982 (or cost of acquisition, if later), costs incurred in improving the asset, an indexation allowance (up to 31 December 2017), and certain disposal costs.
Reducing capital gains
Claim rollover relief if your company buys new chargeable business assets within one year before or three years after selling a business asset. This effectively postpones any tax liability until the new asset is sold.
Special rules apply if the new asset is a depreciating asset (e.g. an asset which will become a wasting asset within 10 years of the relevant time). A wasting asset is an asset with a useful life of not more than 50 years.
Negligible value claim
Claim relief on assets that have become worthless. A loss can be claimed even though the asset has not been sold, and this can then be offset against chargeable gains.
Getting the timing right
The timing of certain payments and receipts of income is crucial for tax purposes. By moving a date of payment or receipt by just a few days either side of the company’s year end, you can reduce the tax bill and defer payment until the next tax year.
- Ensure that charges on income (for example, annuities and royalties) are paid before the year end
- Ensure that any provisions made are against specific costs, not a general estimate
- Ensure that any pension contributions are paid before the year end
- Consider whether any additional remuneration/bonuses should be voted to directors in respect of the current accounting period (these can be paid up to nine months after the year end)
- Ensure that you value stock and work in progress taking into account any reduction arising as a result of obsolescence.
- Plan to bring forward any capital expenditure into the current accounting period
- Sell assets, such as property or shares, that will give rise to a large chargeable gain until after the company's year end
- Forget the effect this will have on your accounts as if you reduce your profits, the bank manager may wonder if that lending was such a good idea after all!
- Sell assets on which capital allowances have been claimed until after the year end