Let’s start with the basic premise that paying tax is often a good thing since it means you are making a profit!! That said the burden of tax is high in the UK when you include all the direct and indirect taxes. Clearly therefore you should review your circumstances to determine if you are paying the correct taxes legally and potentially because there has been so much press on the subject, morally as well.
Let’s have a look at the type of things you should look at. Provisions
Most accounts will have provisions for bad or doubtful debts (providing they are specific not general), stock obsolescence or devaluation, accruals for contracted expenditure at a year end which may be invoiced later and so on.
In addition there are often useful discussions to be had on holiday and sick pay provisions, bonuses (providing they will be paid within 9 months of a year end), and dilapidation provisions (where leases are coming to an end and repairs are necessary under the lease terms), also warranty and guarantee liabilities due under contracts.
Payment based tax reduction ideas
In addition to provisions there are a range of payment based tax reduction possibilities, which include:
- Pensions – An employer can make (subject to limits) payments into an employees pension fund which will reduce taxable profits in a business and be tax free for the employee. Clearly one disadvantage is that money is tied up to later in life (at least until tax free drawdown at 55).
- Bonuses – clearly a bonus will reduce company profits and the individual will receive “cash” but there are additional costs in National Insurance and also cash flow disadvantages in the payment of the tax. Dividends have no national insurance implications, potentially significant cash flow advantages as regards timing of payments but do not reduce taxable profit. Care should be taken therefore in deciding between salary/bonus/dividends what the overall drivers and requirements are.
- Capital Allowances – the incentives for purchasing assets are much diminished after the last budget but 100% allowances are still available and if the asset is required commercially take advantage of the tax savings that will arise. Care needs to be taken when buying commercial property since depending on the type of building significant proportions of the asset may qualify for capital allowances. For those with “green” credentials there are improved allowances on low CO2 emission cars and other energy saving items.
- There are significant tax planning opportunities for anyone engaged in research and development or purchasing goodwill (franchisees buying territories on a resale may qualify for some useful tax write offs if structured correctly.)
Share Based Incentives
There are a wide range of approved and unapproved share option schemes which if used correctly can reduce corporation tax liabilities and show significant advantages to key employees in overall after tax cash available to spend.
Beware of the unapproved “gift” of shares to an employee since instead of saving tax you could significantly add to tax liabilities of the person you are trying to reward.Schemes
This is the “moral” dilemma bit since post the “Jimmy Carr” effect there has been a huge decline in tax schemes. However there are some perfectly legitimate and potentially effective tax planning ideas covering a range of taxes which are still open to debate, albeit a brave man who undertakes one in the current climate.
There are a whole range of employee benefit and salary sacrifice ideas in the market place which can add value to employer and employee alike and be relatively tax efficient.
On the face of it most people say this is a tax we have to pay – well yes but the use of flat rate schemes, cash accounting, annual schemes and special or partial exemption schemes can all improve cash flow and/or overall VAT advantages so again planning is the key.
In conclusion therefore, whilst tax is not entirely a discretionary item of expenditure it can be significantly reduced with foresight, planning and good implementation.