Tax Saving for Companies

Tax legislation is ever changing

Tax legislation is ever changing, as are the commercial factors that affect your business. Carrying out pre-year-end tax planning is not just prudent business practice – it can result in tax savings.

One method to reduce the tax bill is to bring forward expenditure before the company's year-end. Bring forward payment of a bill by a few weeks can advance the related tax relief by a full 12 months.

The types of expenditure you might consider include: building repairs and decoration; advertising and marketing campaigns; and redundancy and closure costs. Payments into a company pension scheme are only allowable for tax purposes when the payments are actually made, as opposed to when they are charged to your accounts.

You should also think about bringing forward capital expenditure on which capital allowances are available. In general terms, there is an annual allowance of 25 per cent for expenditure on plant and machinery. Small and medium sized businesses qualify for higher first year allowances within the year of expenditure of 40 per cent. Small companies also benefit from a rate of first year allowance of 50 per cent, for a period of two years from April 2006.

Expenditure on designated energy saving technology and products qualifies for allowances of 100 per cent, and details can be found by logging on at www.eca.gov.uk.

Make the most of allowances now, because the Government has announced that there will be significant changes to the system of capital allowances from 2008/2009 onwards.

Trading losses may also be used to reduce the corporate tax bill. Companies incurring tax losses can: set them against any other income or capital gains arising in the current year; carry them back for up to one year and set them against total profits; carry them forward and set them against future trading profits.

Directors and shareholders of family companies can save on national insurance contributions by taking profits in the form of dividends rather than as increased salaries or bonus payments. The outcome of the recent Arctic Systems case underlined the validity of this approach, although the profession is scrutinising HM Revenue & Customs (HMRC) to see if it will play poor loser and try to change the law. Company profits taken as a dividend will be charged a minimum of 20 per cent corporation tax from 1st April 2007.

Companies can minimise their tax liability by managing closely loans made to directors and shareholders. If a close company (broadly speaking, one controlled by its directors or by five or fewer shareholders) makes a loan to a shareholder, the company will be required to make a payment equal to 25 per cent of the loan if the loan is not settled within nine months of the end of the accounting period. The loan may also give rise to a tax liability to the person being loaned the money, on the benefit of a loan provided at less than the market rate of interest. For the 2007 financial year, businesses with annual profits that do not exceed £300,000 will be charged corporation tax at a rate of 20 per cent. Where profits are more than £1,500,000 the full rate of 30 per cent applies. Marginal relief resulting in rates between 20 and 20 per cent are charged to businesses whose profits fall within the two figures.

However, there is a sting in the tail for small businesses. While the Government announced a reduction in the full rate of corporation tax to 28 per cent from 1st April 2008, the small companies' rate will increase to 21 per cent from 1st April 2008 and to 22 per cent from 1st April 2009.