End-of-year tax planning

PETER HARRUP of accountancy firm PKF offers some tax-saving tips for businesses approaching a financial year-end on December 31

MANY companies have December 31 year ends and will now be thinking about undertaking tax planning to mitigate their tax liability for the year.

One of the simplest ways to do this is to create tax deductions by bringing forward expenditure that would otherwise have been incurred in a subsequent accounting period. Such action can also be very beneficial where the company would otherwise pay tax by instalments rather than nine months after the year end.

Some, for example, will be looking at making pension payments on behalf of the shareholders/directors. The annual allowance reduced to �50,000 from April 1, 2011 but in some cases, where no or only small pension contributions were made in respect of individuals in earlier years, it may be possible to make contributions on behalf of those individuals of up to �200,000 in the current year.

Typically many directors are reluctant to tie up their money in schemes that are not easily accessible. Whilst it is possible to borrow sums from the pension fund, these are only over a term of five years and on a repayment basis. It is, therefore, common for bonuses to be declared by companies before the year end, although care must be taken to ensure the bonus is actually paid within nine months of the year end to ensure deductibility in the current year.

In all cases of employee reward it is also important to ensure that any payment is made wholly and exclusively for the purposes of the employer’s trade, otherwise it will not be tax deductible. Large pension contributions and bonuses will need to be justifiable, perhaps from the perspective of employee retention or to recognise the contribution the employee has made to the business.

Businesses will also be looking to maximise their capital allowance claims. Currently they are eligible for 100% relief on expenditure covered by their annual investment allowance (AIA) of �100,000. Consideration should be given to fully utilising this allowance before the year end to ensure it is not wasted. The AIA is being reduced to �25,000 from April 2012 so a company with a December 31 year end will only have an AIA of about �43,600 next year.

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Also, companies often make provisions for future tax deductible expenditure in their accounts, especially for repairs to buildings and assets. The general rule is that a deduction can be claimed in the year of provision provided, at the balance sheet date, the company has a legal or constructive obligation to incur the expenditure, the obligation arises as a result of a past event, it is probable the expenditure will be incurred and a reliable estimate of it can be made.