Business Tax Matters

With the right help and advice, you can reduce the amount of tax you pay to a minimum. Review your planning with us now. Don't hesitate - Contact us imediatley on +44 (0)20 8444 2000 or e-mail us on langleys@langleygroupllp.co.uk

2002/03 dates and deadlines
Reduce your NI contributions
Should you declare a dividend or a bonus
Reduce your capital gains tax liability

Reducing your business tax bill

Everyone in business aims to make a profit - and with higher profits will come higher taxes. Many businesses will pay more than their fair share in tax this year, but with a little careful planning big savings can be achieved. Here are six strategies - some year-round, others concentrating on the end of your financial year - which could help you to minimise the tax take from your business profits.

1. Accelerate or defer income

If you expect to be moving into the higher rate tax bracket next year, accelerate income by delivering goods, completing services and issuing invoices before the end of your financial year thus drawing the income back into the current year for tax purposes.

Alternatively, although the full value of completed work must be taken into account at the year end, incomplete work is usually valued at only cost, with no 'cost' for proprietor's time. So take care valuing work in progress, to avoid unnecessarily inflating current year income.

Proprietors also sometimes make the mistake of overvaluing stock at the year end ? again leading to an overstatement of the year's profit. In particular, avoid overvaluing obsolete stock.

2. Claim all you can

Avoid paying too much tax as a result of claiming too few deductions.

Keep proper records of all business and business?related expenses, so a full claim can be made in your accounts or tax return. This includes salaries and wages, professional fees, interest on business debts, insurance, or perhaps the cost of maintaining an office in your home (including telephone, fax costs).

3. Write off your bad debts

Although a general bad debts provision is not allowable for tax, where specific amounts can be identified as irrecoverable or doubtful, tax relief can be claimed.

4. Claim for capital expenditure

Tax relief for capital expenditure is not restricted to the cost of furniture, computers, machinery and cars - keep records of all capital expenditure so we can claim for all allowable costs in your accounts and tax return.

5. Accelerate or defer expenditure

Most businesses receive a 40% first year deduction on expenditure on plant and machinery and many will obtain a 100% deduction for IT equipment (especially important, given the effective working life of a computer is now less than two years).

If you anticipate incurring expenditure a few weeks into your next financial year, consider accelerating the purchase to obtain a 40% or 100% deduction this year.

6. Reduce profit extraction costs

Instead of drawing a bonus or extra salary from your company, consider paying a dividend. The tax saving is small, but the reduction in national insurance costs can be as much as 21.8%, split between you and the company.

Profit extraction is a complex area of planning, with many implications, so discuss your plans with us before you put them into action.

These are just some of the strategies which we can help you put into place and which, taken together, can make a real difference to your business 'bottom line'.

2002/03 dates and deadlines

Reduce your NI contributions

Increases to national insurance from April 2003 means that you should now be considering steps you could take to reduce your contributions bill.

Below we have highlighted the NI saving if you extract some of your company's profits by dividend rather than bonus. Scope to save NICs is limited, but other areas include:

• increasing the amount the employer contracts to contribute to company pension schemes

• all?employee share ownership plans (shares bought out of pre?tax and NIC income)

• for small companies, disincorporation and instead operating as a sole trader or partnership

• paying less by way of salary, more as a bonus to reduce employee (not director) contributions

• provision of childcare

and generally, consider your current policy on company cars. A surprising number of people have not yet fully appreciated the effect of the modifications to the system which took effect from 6 April 2002 and will come into effect on fuel provided after 5 April 2003.

Should you declare a dividend or a bonus.

Clients often ask us whether it is better to extract profits from their companies by declaring a dividend or by voting a bonus.

There are a number of factors to bear in mind when considering this:

• the level of remuneration, especially for spouses of shareholder directors, needs to be justifiable, and take into account the National Minimum Wage regulations

• the absence of an upper earnings limit for employers' Class 1 NICs means that all bonuses and similar payments increase the cost to the company

• the rate at which secondary Class 1 NICs are paid is set to increase next year from 11.8% to 12.8%

• the rate of employee contributions will increase next year from 10% to 11% on earnings between the lower and upper earnings limits, but more importantly NICs at 1% will be payable on earnings over the upper limit (currently £585 per week)

• the corporation tax rate now starts at 0%

The combined effect of these changes is to make the bonus option less attractive for small companies but marginally more attractive for large companies.

Case study:

For the moment, consider how much might be saved if, as an owner director, you extracted the £20,000 profit your company makes in 2002/03 and 2003/04 by way of a dividend rather that a bonus. (We have assumed that you are paying higher rate tax, so your earnings exceed the so-called 'upper limit'.)

As you can see from the chart below, at the rates expected for 2003/04, the net amount is increased by over 26% by taking the dividend option

It is clear that many factors must be considered when deciding whether directors should be paid by dividend or salary/bonus. In practice, a combination of each is usually the best course.

Dividends are usually payable to all shareholders. Although it is possible to waive dividends, this can have tax implications, so it may be appropriate to have different classes of share. Be sure to check with us first because this is a complex area of tax law.

Finally, you will need to consider with us the effect regular payment of dividends will have on the valuation of shares in the company.

Reduce your capital gains tax liability

For disposals the maximum 75% taper relief is available for business assets held for two complete years, or more.

Because the taper is applied to the net chargeable gains for a year (i.e. after setting off losses of the same year and any losses brought forward, and more importantly before the capital gains tax (CGT) annual exemption), the effective rate of CGT on the disposal of business assets can be less than 10%.

Case study: Assuming a business asset is disposed of in May 2003, having been held since before 5 April 1998. The holding period will qualify the gain for the:

Clients planning to dispose of business or other assets that may give rise to sizeable capital gains should contact us before acting to discuss the most appropriate course of action to maximise tax savings.

CGT retirement relief

This relief is being phased out, and will not be available for disposals after 5 April 2003.

If before then you will be aged 50 or over, or you face early retirement due to ill-health, and you will have been in business for more than one complete tax year, you should discuss your options with us now.

Securing higher relief - without 'retiring'

The phasing out of this relief has meant that some business owners have turned their thoughts to early retirement to save tax. There are, however, alternatives which can mean you secure the relief while remaining at the business helm.

Is it worth acting now?

The answer depends on a number of factors ? but essentially you will need to balance the advantage of obtaining the relief against the impact a shorter holding period might have on your business assets taper relief. The tax payable after the maximum taper relief may be quite small ? smaller perhaps than the costs of transferring a business to a company, or shares in a company to a trust.

Discuss your plans with us, so we can help you to evaluate whether acting now would be appropriate.

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