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OMB company – tax planning

Accountants and business advisers Friend Partnership discuss tax planning in the start of a series of blogs dedicated to OMBs (owner managed businesses).


I am now going to concentrate on limited companies with a series of blogs specifically targeted at such entities and their owners:

 


Some straightforward planning opportunities are detailed below in no particular order of priority:


  • Deferring income and advancing expenditure is the simplest way to reduce tax liabilities. However, the commercial pressure for good results and the strictures of the accounting regime means that this is very rarely a practical approach.
  • Provisions – ensure that all stock, bad debt and other provisions made in the year are specific in nature and amount as these will be deductible for tax purposes. General provisions, such as 5% of bad debts, will not be allowable.
  • Pension payments – are deductible for tax but only in the accounting period in which they are paid – a year end accrual is not sufficient. In view of the fact that individuals can now access their pension pots more easily pension planning has become more attractive than it has been in the past.
  • Management/staff bonuses – if there is a commitment at the year end to make such bonus payments they will be deductible in the period so long as they are paid within nine months of the end of the period. This gives the company the flexibility to agree the amounts to be paid after the financial results for the year are known.
  • R&D – if the company is undertaking R&D it will be very important to ensure that all necessary conditions are met to enable the company to claim an enhanced deduction of 130% (from 1st April 2015) of the R&D expenditure incurred in the year. So for every £100 spent a tax deduction of £230 is available. In certain situations R&D losses can be surrendered in return or a tax payment at 14.5% of the amount surrendered. The big question is quite simply; is the company carrying on a qualifying R & D activities.
  • Patent box – if profits are being generated by a company as a result of the exploitation of patents which the company has secured ensure that all the necessary conditions are met to secure the reduced tax liability – 10% by April 2017. The rules have been challenged by Germany because the UK legislation is viewed as favouring the UK and is thus deemed as anti-competitive. This threat now seems to have disappeared.
  • Intangible assets – a deduction may be available in certain situations for the amortisation of intangible assets. The legislation was changed by the Summer Budget such that a deduction for the amortisation of goodwill and customer related intangibles is no longer available but remains for other intangible assets.
  • Capital allowances – with the Annual Investment Allowance at £500,000 (£200,000 for expenditure after 1st January 2016) for most companies capital expenditure should qualify for a 100% deduction. This can have an important bearing on the company’s cash flow. If an item of plant is acquired under an HP agreement capital allowances will be available on the full capital cost of the plant on the day the contract is signed, i.e. there is no spreading of the relief over the term of the contract. Certain assets, such as integral features, have to go in to separate pool for capital allowance purposes. With any major capital expenditure project it will be important to ensure that capital allowances are thought about up front so that all the necessary paperwork can be generated and retained.
  • Profit extraction – remember that dividends are not deductible for corporation tax purposes but salaries and bonuses are. Dividends require distributable reserves but salaries do not.
  • Notwithstanding the changes announced in the Summer Budget the tax regime is such that it is still more beneficial, from a total tax point of view, to take profit from a company by way of dividend rather than salary. This is still relevant for those director shareholders in a position to do so.
  • Creative sector – there are various reliefs available to companies involved in creative sector activity, TV/video/theatre etc.


There may be other reliefs available depending upon the company’s particular activities.


With all tax planning care is needed in light of HMRC’s expanding raft of anti-avoidance legislation which can in certain cases catch simple planning initiatives.


However, if the above ideas are properly dealt with no issues of concern should arise.

28 Mar, 2024
Theatre Tax Relief is a valuable, and often under-used, tool for theatre production companies. David Gillies at Friend Partnership, provides the latest insights
26 Mar, 2024
The upcoming changes will mean that from 1 October 2024, an estimated 132,000 businesses will be exempt from non-financial reporting requirements.
14 Mar, 2024
The UK's tax system for individuals classed as "not UK domiciled" (often called "non-doms") is undergoing a significant overhaul. This system has traditionally offered tax advantages for foreign income and gains, but those benefits are coming to an end. Non-domiciled individuals are generally those who haven't established strong ties to the UK in terms of residence or family connections. Previously, they enjoyed a tax perk known as the "remittance basis of taxation." This allowed them to avoid paying UK income tax on foreign income and capital gains, as long as the money remained outside the UK. However, these advantages have been gradually restricted in recent years. The new reforms, announced by the Chancellor of the Exchequer – Jeremy Hunt, represent a change to the existing non-dom tax system. The New System - What Does it Mean Non-Doms in the Future? Starting April 6th, 2025, a new system will be in effect. Here's what it entails for non-domiciled individuals who become UK resident after that date: Temporary Tax Exemption: If you haven't been a UK resident in the past 10 years and become one after the reform, you'll benefit from a temporary tax exemption. This means your foreign income and gains will be exempt from UK income tax for the first four years of your UK residency. Standard Taxation After Four Years: After the initial four-year grace period, your foreign income and gains will be taxed on the same basis as other UK residents. To avoid double taxation, relief will be available against UK tax under Double Tax treaties or the Unilateral system for any foreign tax already paid. What about Existing Non-Doms? The government acknowledges the complexities of transition for current non-dom who are UK residents. Transitional rules are being considered to ease the shift. These may include: Reduced Tax Rate for Bringing Foreign Income to UK: Existing non-doms might be offered an opportunity to bring previously untaxed foreign income and gains back to the UK at a reduced tax rate. Rebasing Foreign Assets for Capital Gains: There's also a possibility of "rebasing" the value of non-domiciled individuals' foreign assets for capital gains tax purposes. This could mean using the asset value in 2019 as a baseline, potentially reducing their future capital gains tax liability. Uncertainties and Taking Action The details of the new system and the transitional rules are still under development. The full picture will become clearer when the government publishes further consultations later in the year. Given the complexities involved, it's crucial for individuals who might be affected by these reforms to seek professional tax advice. Understanding the opportunities and potential pitfalls of the new system can help you make informed decisions about your financial future. While the non-dom tax reform simplifies matters to a certain extent, it introduces new considerations for individuals with international finances. Staying informed and seeking professional guidance will be key to navigating these changes effectively.

Friend Partnership is a forward-thinking firm of Chartered Accountants, Business Advisers, Corporate Finance and Tax Specialists, based In The UK

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