Why the year-end chat should start well in advance
Paul Burton always aims to be proactive in the advice he gives to clients. That way tax planning becomes so much easier.
An important part of my job is to ensure that clients are informed of the tax efficient planning opportunities available to them well in advance of the year end date in order to allow them sufficient time to assess each of the options available to them and decide whether these opportunities are right for them. In order to provide clients with enough time to make informed decisions in relation to pre-year end tax planning, these conversations need to start well in advance of the year end date to prevent any last-minute scrambles and pressurised decision making.
When it comes to discussions on efficient tax planning opportunities with clients it pays off to be proactive. Meeting with clients during the final quarter in advance of the year end, provides an excellent opportunity to discuss the business owners aspirations and strategy for the coming twelve months, allowing us to provide tailored tax planning advice which suits the specific needs of each client.
Here are some of the tax planning topics which are frequently raised in advance of the year end:
First of all, we look at the profits which have been extracted to date, then take into consideration the client’s specific circumstance in order to assess whether there are any additional requirements in the coming 12 months. This may be that the client has a big life event coming up; possibly a family wedding, a house move, maybe even planning a big family holiday or winding down to retirement. It is important to think ahead in order to ensure that the needs of the client can be met and profits can be extracted from the business in a tax efficient way.
There are several ways in which this can be achieved; looking at a combination of salary and dividends (provided the individual is a shareholder), providing a solution which fits the needs of each client while taking advantage of the tax free allowances available. There is also the additional consideration of pension contributions which are an extremely tax efficient method of profit extraction. Given that a pension fund can grow tax free, it’s an efficient way of investing in the future and has the added benefit of allowing the company to access corporation tax relief on contributions made on behalf of employees. If there is a possibility of making a contribution before the year-end date, it’s worth discussing.
Bonuses can be used to reward key members of the team who have contributed to the success of the business, but who are not necessarily shareholders. Depending on the employee’s level of earnings, the marginal rate of tax payable on a bonus may be significant. Perhaps it would be more beneficial to discuss the potential of an additional pension contribution or the provision of other benefits to top up their remuneration package, such as a company car?
Where a company has undertaken significant investment in capital expenditure during a financial year for the purpose of their trade, there can be some very beneficial tax reliefs available in the form of Capital Allowances. It is also possible to claim 100% tax relief on qualifying expenditure by utilising the Annual Investment Allowance (“AIA”) available to businesses, up to a value of £200,000.
When advising clients in the lead up to their year end date, it is also worthwhile discussing whether they are utilising their AIA in full and whether there is any additional expenditure which is likely to be incurred in advance of the year end. As the AIA is a use it or lose it allowance it is important to discuss the timing of capital expenditure with clients as it may be worthwhile to defer expenditure into the next year if the AIA has already been fully utilised in the current period.
RESEARCH & DEVELOPMENT (R&D)
Companies involved in a qualifying R&D activity may claim additional tax relief on certain costs incurred directly in the R&D process. The rate at which relief is given is dependent on various factors, however it is possible to access additional relief of up to 130%. Engaging in discussion with clients in advance of the year end can allow you to ascertain whether they have undertaken activities which you think may qualify for R&D tax relief. Small and Medium Enterprises can surrender tax losses generated by R&D tax relief to create a cash repayment, which is another factor which can be useful in discussing tax planning opportunities with clients. .
The current market may result in previously profitable companies making current year tax losses. If a company has been profitable and paid CT in the previous 12 months there is potential to utilise these current year losses against the prior year’s profits and generate a tax repayment. Liaising with your client as early as possible may allow them to access these repayments at an earlier stage. This can be of great benefit to companies where Time To Pay arrangements are in place for tax liabilities currently overdue and cash flow is tight.
SHAREHOLDING STRUCTURES AND SUCCESSION PLANNING
Many of the clients which I deal with are family owned businesses. It is an important aspect of my role to assist clients not only with potential tax planning opportunities in advance of the company’s year end date but also to engage in discussions surrounding the future success of the business and the owner’s plans for the future. Commencing discussions of succession strategy and the future strategy for exiting the business allows the management team time to consider how this will be achieved and begin putting the necessary operational frameworks in place to achieve these long term objectives. It is also important to assess how any shareholder who is planning to exit the business can do so in a way which fits with the aspirations of the company, whilst also being achieved in as tax efficient a way as possible for both the company and the individuals involved.