Tax planning for business owners ahead of new financial year

It is just over a month until the end of the tax year, and so it would be prudent to start considering your tax planning.

There are various changes coming this year which it is important to be mindful of. For instance, from 1 April, the corporation tax rate will be increasing from 19% to 25% for companies with taxable profits over £250,000.

Companies with taxable profits of less than £50,000 will continue to pay tax at 19%.

However, companies with profits between £50,000 and £250,000 will be eligible for marginal relief. This acts to increase the average tax rate gradually until it reaches 25%, we explain that fully in the next section.

The effective tax rate is set at 26.5% to ensure that those with profits over £250,000 are taxed at 25%. This is outlined below:

• On profits of £0 – £50,000, the rate is 19%;
• On profits of £50,001 – £250,000, a marginal rate of 26.5% applies; and
• On profits of over £250,000, the rate is 25%.

If a company has one or more associated companies in the accounting period, then the limits are divided by the number of associated companies plus one. For an accounting period of less than 12 months, the lower limit and the upper limit are proportionately reduced.

How will ‘marginal relief’ work between the two rates of corporation tax?

The new system of taper relief will mirror that used for corporation tax in the 2014/15 tax year (the last time marginal relief applied to corporation tax).

With this in mind, use the following formula to calculate your CT tax liability:

Let’s use an example annual profit figure of £100,000

1.  Multiply your annual profits by the main 25% rate (£25,000).
2. Subtract your annual profits from the £250,000 threshold (£150,000).
3. Multiply step (b) by the marginal rate multiplier of 3/200 (£2,250).
4. Take away step (c) from step (a) – £25,000 – £2,250 (£22,750).

So, in this example, the CT liability is £22,750. This represents a tax increase of £3,750.

In other words, there will be a 26.5% rate between £50,000 and £250,000.

Should I change my company’s year-end?

If your business tends to have cyclical profits and/or there is likely to be a large gain in an accounting period that will include 1 April 2023, it might be sensible to consider changing the company’s year-end.

For example, with an accounting period ended 30 September 2023, the effective tax rate across the whole year would include the new rate as well as the current rate, leading to higher tax contributions overall.

However, if the company changed its year end to 31 March 2023, it would only pay tax at 19%. Before making any changes to your year-end, you should consult your accountant/tax advisor.

Should I shorten my accounting period?

In addition, if the company is predicting a large gain prior to 31 March 2023, shortening the accounting period could be a viable option.

Companies can shorten their accounting period ends more frequently than extending their year-end date as there are limitations on how often companies can lengthen their accounting periods (this can only be done once every five years).

However, please remember that this will change the filing date of the accounts and tax computation.

Capital expenditure

Capital allowances can be claimed on expenditure on certain types of assets used in your business.

The Annual Investment Allowance (AIA) is a particularly valuable relief for businesses.

100% relief is given for expenditure on most types of plant and machinery and many fixtures in buildings, up to a limit of £1 million.

A 50% first year allowance has been introduced for qualifying ‘special rate’ assets acquired in the two-year period from 1 April 2021.

Structures & Buildings Allowance (SBA) can provide relief for expenditure on new non-residential buildings, including new conversions and renovations. Relief is given at a flat rate over 33 and a third years at 3% per annum.

You may still be able to claim the relief beyond April. Whether you can or not depends on the timing of when the spend is.

For instance, old expenditures can still be claimed after the as long as any qualifying items were purchased from 1 April 2021 to 31 March 2023.

Technically, super-deduction will continue to form part of capital allowance reviews up to 31 March 2025. This is because of the ability to amend and resubmit tax returns where super-deduction is available.

Furthermore, if work is unconditionally agreed on or before 31 March 2023, you will have 4 months after for the spend to still qualify. You will always need to provide proof of this in the event of an HMRC enquiry.

Unfortunately, any expenditure incurred after 31 March will not qualify for the tax relief. We would advise that if work on a project can be brought forward, this should be done as it may help the business qualify for the relief.

Top tips

• To accelerate tax relief, consider purchasing new assets before the new ‘super deduction’ and first year allowances expire in March 2023.
• Think of the timing of when you should dispose of cars and other equipment. The timing of the disposal may affect the taxable profit for the year.
• If you intend to purchase commercial property (including Furnished Holiday Lettings) containing fixtures, you should seek advice to ensure that the maximum capital allowances are claimed. This is because any value attributed to the fixtures on purchase must be agreed by a joint election between the seller and the buyer.

Our Williamson & Croft experts are at hand to help you with any questions you may have about the enhanced capital allowances.

R&D changes

In Chancellor Jeremy Hunt’s November statement, major changes were announced to the SME R&D Tax Relief and the Research and Development Expenditure Credit (RDEC).

Hunt announced that for expenditure on or after 1 April 2023, the R&D Expenditure Credit (RDEC) rate for large companies will increase from 13% to 20%, but the SME additional deduction will decrease from 130% to 86%.

Furthermore, the SME credit rate will decrease from 14.5% to 10%.

The government will also eventually consult on the design of a single scheme.

It appears Hunt is seeking to make the UK RDEC regime more internationally competitive, whilst controlling the overall costs of the R&D tax incentives with the new measures.

There have been concerns that the SME regime has been abused and/or errors made. Therefore, the reduction in the benefits under the scheme may be a means to control costs.

Whether you are applying for the SME scheme, RDEC, or a combination of both, the challenge ahead is to make the most of the upcoming changes.

If you think SME R&D tax relief is the best scheme for you, this will mean maximising your expenditure between now and 1 April 2023.

However, if you are looking to file for RDEC, this will mean working with an R&D expert that can help you capitalise on the scheme’s new generosity by ensuring you are claiming for all your eligible expenditure, while confirming that you are protected from HMRC’s stricter approach to compliance.

Business Asset Disposal Relief

Business Asset Disposal Relief (BADR) reduces the rate of capital gains tax (CGT) to 10% on qualifying business gains, up to a lifetime limit of £1 million per person.

The relief applies to a disposal of shares in a trading company.

This is applicable as long as the following criteria, within the period of two years immediately prior to the disposal, is met:

• Are an officer or employee of the company.
• Own at least 5% of the ordinary share capital.
• Can exercise at least 5% of the voting rights.
• Are beneficially entitled to at least 5% of the profits available for distribution or 5% of the distributable assets on winding up.
• On a sale of the company, would receive at least 5% of the consideration as a result of holding the shares.

Furthermore, the relief can also apply to the disposal of a business or part of a business, and certain assets used in a business.

However, the following restrictions apply:

• There is personal use of a business asset.
• The asset was used in the business for only part of its ownership period.
• You were not involved in the business throughout the ownership period.
• The asset has been rented to the business.

Top tips

• Planning should be carried out well in advance of any sale, to ensure that all conditions are satisfied prior to disposal.
• Pre-sale restructuring could help maximise the relief available to a couple who work for and own shares in a family business.
• If you have already used all available relief, it may be possible to give shares to children, perhaps using a trust structure.
• Where assets are held jointly by a couple but used in a trade carried out by one spouse only, restructuring may need to be carried out.

Business Property Relief

Business Property Relief (BPR) can reduce or completely remove the value of a business from the charge to inheritance tax.

This applies to both lifetime gifts and on death.

Furthermore, if the donor dies within seven years of such a gift, BPR will only be given on death if the original property is still owned by the recipient at the date of the donor’s death and still qualifies as relevant business property.

Relief is currently available at 100% for a business or shares in an unquoted trading company.

Relief at 50% applies to a controlling holding of quoted shares; and to land, buildings, plant, and machinery used in a business carried on by the transferor, a partnership of which they are a member, or a company they control.

The property must have been owned for at least two years prior to the transfer to be eligible.

Top tips

• You should take specialist advice if your business involves the provision of land (for instance, FHLs or livery businesses). The level of services provided is usually key to the availability of relief, but this is a complex area and should be carefully considered.
• Ensure that BPR is not inadvertently lost by leaving assets eligible for the relief to an exempt person – this can be a spouse or civil partner.

Contact us today for any guidance on tax planning ahead of the end of the financial year.