Year End Planning

Can I reduce my tax bill?

Can you reduce your tax bill? It depends! What does your business plan say? Ultimately you want to be paying lots of tax, more than you can imagine, because if you were, then just think how much profit you’d be making!

So before we examine how to reduce tax, you should examine how to make more profit in the medium to long term. How is business going? How much impact do your regular planning sessions make? Do you leave things just until the year end, and only review them once a year? And if so why?

A pragmatic business will consider things more often. Anyway, here’s a “once a year” guide for those who need it. These measures may help reduce or postpone profits (and therefore taxes), but you still need to bear in mind whether this is appropriate commercially. If you are going to talk to the bank about a loan, then you might want to increase profits and not reduce them!

In order to make the accounts look good and minimise any tax liability, you can consider the following:

Chase debtors in order to get payments into the bank account now. A good bank balance on the year end date helps.

Is there enough money in the bank to cover the tax forecast you have? Consider how much money you have taken out of the company. Ignore salary and reimbursed expenses for the moment, and just think about additional drawings. If the additional drawings exceed your net profit, then you may have taken out too much. HMRC charges income tax on a personal “benefit in kind” if your company is providing you with (what is in effect) an interest free overdraft. If this is likely to be a problem, you may want to consider injecting some cash into the company bank account before the year end date. The important thing is to have a healthy balance sheet on the year end date.

If you can legitimately delay issuing invoices to clients this month then do that. Issue them in the first month of the next trading year. Depending on the accounting treatment, that may put potential taxable profit into the later trading year and delay the tax liability for a further twelve months.

Ensure that you, and any of your staff, prepare expense claim forms for all expenses incurred by the end of this trading year.

Bring forward any anticipated expenditure on major purchases. For example, if you were planning to buy a new computer early in the next trading year, buy it this month so that tax relief can be claimed sooner. This can be beneficial, even with more mundane items of expenditure. If you are about to replenish anything, incur the expenditure now, before the year end! Each item on its own may not be much, but they soon add up and they make a difference.

Tax relief cannot be claimed for holding stock. Do not buy more stock this month, wait until next month. If you sell goods as opposed to services, or if your business is a mix of goods and services, then you need to plan a stock take for the last day in the trading year. A stock take is going to be easier if you aim to have as little stock as possible around the year end date. Tax relief can only be claimed for stock which has been sold so there is no point holding onto any more stock than you really need to!

Look at the bad debts that have arisen during the year. If any of these debts are more than 6 months old, write them off now and claim bad debt relief. Prepare a further copy of the original invoice and (in red ink) write across it “Bad debt relief claimed” and write the date that you made the decision. You have to make that decision before the year end date. In order to qualify for bad debt relief for both corporation tax and for VAT, you must write to the debtor stating that you consider the debt to be irrecoverable and you are claiming bad debt relief.

Consider any invoices that have been issued which may give rise to a credit note. To the extent that you can predict the need to raise a credit note, do it now before the year end.

Do a ratio analysis. Ratio analysis is exactly what HMRC does, so it’s a good idea if you do it before they do. Compare your own profit and loss forecast for this current year with the formal accounts for last year. Think along the lines of “are my travel costs this year in line with last year”? If expenses in the current year are significantly higher than the year before, you need to be ready to explain that extra cost in the event of a tax office enquiry.

Likewise, if one expense category in the current year is significantly lower than last year you might have missed some expenses. Think about anything that could have been overlooked and which needs to be put through the books . . . in these last few weeks . . . before your year end.

All these things should already be in the “plan, do, review” section of your business plan. What does your business plan actually say?