One of the difficulties in tax compliance is that when completing annual Tax Returns or Accounts, we’re always working a year back, with historical data, which can sometimes mean it’s hard to forecast ahead.
This can be a problem as we all like to know what payments we’ve got ahead of us so we can budget appropriately.
Advantages of cloud accounting
One of the beauties of cloud accounting software, such as Xero, means that it’s easy for us look both backwards and forwards at your business data so we can give you the most up to date estimates of any tax liabilities falling due in the near future.
Here at Friend & Grant our dedicated Business Software Solutions team are equipped with the skills and knowledge to ensure your business accounting software and processes are running as efficiently as possible.
If you’re struggling with any aspect of bookkeeping and want to know if there’s a better solution, then please get in touch with our head of cloud support Bradley Medhurst, or call the office on 01634 731390.
The benefits of Profit Forecasting in Businesses
Let’s look a little deeper into the benefits of keeping accurate live data and forecasts:
Reliable profit forecasts are particularly important at the moment, with the changes to the taxation of sole traders and partnerships from 2024/25, and the complicated transitional rules that apply in 2023/24.
The transitional rules may result in higher tax bills if your business does not have a 31 March or 5 April year end.
Profit Forecasts & Figures
If we have reliable profit forecasts for your business, we can determine whether or not changing your business year end would be beneficial, and also determine the timing of that change.
Having a live software such as Xero also means that we can see up to date figures for the current accounting period, meaning we can determine whether you’re likely to have a higher tax bill and advise accordingly.
By the time we come to preparing your Tax Return, the tax year is over and it’s too late to take any active steps to reduce your tax, however with live software, we can provide advice ahead of the end of the tax year.
This means we can help mitigate your tax payments, whether it be via pension contributions, reducing your payments on account accordingly or advising on certain tax beneficial investments.
From 1 April 2023 the rate of corporation tax that a company pays depends on the level of the company’s profits and the number of “associated companies”.
“Associated companies” are those under common control, which may include companies controlled by close relatives under certain circumstances.
Calculating the corporation tax
Assuming a company has no “associated companies” then the 19% corporation tax rate continues to apply where profits are no more than £50,000 and the 25% corporation tax rate applies where profits exceed £250,000 a year.
The £50,000 and £250,000 limits are divided by the number of “associated companies”.
In between the limits there is marginal relief to achieve the transition between 19% and 25%.
Marginal tax rate
The marginal tax rate between £50,000 and £250,000 is 26.5% and thus tax planning can be particularly effective.
For example buying new equipment or paying additional pension contributions on behalf of the directors would potentially save 26.5% corporation tax.
Timing of expenditure is critical here, as the expenses would need to be incurred before the year end.
Reviewing your company tax position
We would recommend a review at least 2 months before the company’s year-end, with reliable profit forecasts available to allow time for pre-year-end planning.
If you’re interested in setting up a pre-year end tax planning meeting then please contact your account manager.
“Associated companies” for corporation tax purposes are those under common control.
The most obvious situation is where one of the companies has control of the other, or both of the companies are under the control of the same person or persons.
Factors in determining control
In determining control, the rights and powers of an individual’s associates, broadly close relatives, may be taken into consideration, but only where there is substantial commercial interdependence between the two companies.
This could be financial, economic, or organisational interdependence and will depend on the facts of each case.
An example would be where a brother and sister each have their own limited companies and there is a large loan or significant trading between them, such that one is dependent upon the other.
This is not a straightforward matter and with limited case law to help judge HMRC’s view on the new rules, it can be a minefield.
For all our existing clients, we will be reviewing any associated companies as applicable and advising you on the implications, however if you’ve got any queries or concerns then please contact your account manager.
Although not a new measure, where a company has profits in excess of £1,500,000 a year it is required to estimate and pay corporation tax quarterly during the year, rather than 9 months after the end of its accounting period.
Including Associated Companies
What has changed since 1 April 2023 is that the £1,500,000 threshold is divided by the number of “associated companies” in the accounting period, as defined above.
Thus, if a company has two associated companies, if any of them has profits in excess of £500,000, quarterly instalments of corporation tax will be required.
If that company has a 31 March 2024 year end, it needs to pay its estimated corporation tax liability according to the following schedule:
- 25% of its estimated liability by 14 October 2023
- 50% of its estimated liability by 14 January 2024
- 75% of its estimated liability by 14 April 2024
- 100% of its corporation tax liability by 14 July 2024
Profit forecasting for accurate payments
As mentioned above, accurate profit forecasts are required in order to compute the quarterly payments.
Note that this is a significant acceleration of tax payments compared to the normal 9-month payment interval.
Consequently, there is a one year “grace period” that applies for the first year the threshold is breached.
You might also wish to consider minimising the number of associated companies to avoid this cash flow disadvantage.
As a part of your annual accounts and tax compliance service we will actively monitor whether we think you’re at risk of approaching or have already exceeded these thresholds.
That being said, with quarterly payments needing to be made prior to the end of your accounts year end, keeping an accurate forecast of profits is paramount in ensuring it’s flagged up in time.
If you have any queries about the quarterly tax instalment rules, then please contact your account manager.
The Treasury has announced that the Office of Budget Responsibility (OBR) will produce a report on the state of the UK Economy in time for the Chancellor Jeremy Hunt to present his Autumn Statement on Wednesday 22 November.
Last year the Chancellor announced a number of significant changes, reversing many of the proposals in the Kwarteng/Truss mini-Budget the previous September.
What can we expect?
This time we are not expecting too many surprises.
However, the leaks and rumours have already started with suggestions that there will be no significant tax cuts.
There is also likely to be a General Election within the next 13 months so there may be a few tax sweeteners.
The Prime Minister’s statement on 20 September on progress to Net Zero suggests that there may be a number of announcements concerning green energy measures affecting individuals and businesses.
Another suggestion has been the possible abolition of inheritance tax which may encourage traditional Conservative Party voters to stay loyal.
Of course, we’ll keep you all up to date on any changes and advise you on any consequences.
In the weeks before any Budget or Autumn Statement there are always leaks and rumours.
Normally, in the run up to a General Election there are also tax give aways in an attempt to re-elect the incumbent political party.
One rumour that has been circulating in the press concerns the possible abolition of inheritance tax (IHT).
That would certainly be very popular amongst wavering Conservative voters as it would enable them to retain more wealth within the family.
Estate Planning Strategies
This rumour may have the effect of causing families to delay estate planning pending an announcement.
Tax planning can only be based on the tax rules that exist at the time and should not be based on speculation over future law changes.
A further uncertainty concerns tax changes resulting from a possible change in the political party in government.
The Labour Party have history for increasing capital taxes and strengthening the rules concerning the use of trusts in tax planning.
The now disbanded Office of Tax Simplification produced 2 reports in recent years concerning the simplification of IHT and the complicated interactions with capital gains tax (CGT).
The Chancellor may decide to take some of those suggestions on board or possibly abolish IHT and extend CGT to certain transfers on death.
Inheritance Tax Advice
Our resident Inheritance Tax specialist Jan Friend is always available to advise you on any estate planning queries you may have – please contact her via email or on 01634 731390 to discuss any IHT planning.
We will of course keep you informed of any changes in tax legislation that may affect those plans.
You may wish to read Jan’s latest blog in her series of IHT blogs, which discusses the IHT abolition rumour in more detail – Will Inheritance Tax be abolished?
Recent Tribunal decisions in favour of employing companies and against HMRC has caused many organisations in similar circumstance to make protective claims for the recovery of National Insurance Contributions (NIC) in respect of car allowances paid to employees using their own cars or vans for business journeys.
Many employers have a policy of only reimbursing the fuel costs associated with those business journeys (for example at 15p per mile) rather than paying the maximum HMRC Approved Mileage Allowance Payments (‘AMAP’) rates (currently 45p/25p per mile) on a tax and NIC free basis.
The employee can then make a claim for the difference between the 45p allowance and the amount received from the employer as a deduction from their employment income.
The recent Upper Tribunal decisions (which HMRC have confirmed they will not appeal) have held that the amounts paid by the employer in respect of business mileage are exempt from NIC and consequently employers should consider making a claim for repayment from HMRC.
Please contact us if you think you may be entitled to make such a repayment claim.