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Pre Year-End Tax & Profit Review 2023-24

Pre year-end strategies to reduce tax and increase profits

A.D. Pottie & Co Ltd

Phone: 02882840162

Email: info@adpottie.co.uk

INTRODUCTION

If you live and work in the UK, you will probably pay income tax. If so, this guide will show how you can minimize your liability and boost your after tax earnings.

It includes many tips for reducing the impact of taxes on your wealth accumulation including;

  • corporation tax,
  • capital gains tax and
  • Inheritance tax.
  • Property letting taxes

This guide will also point to strategies that you could employ to increase profits.

The key, as the title of this guide implies, is planning BEFORE the end of your trading year, or the tax year (5 April 2024).

Very often, opportunities to increase your after-tax earnings are overlooked, and permanently lost, because key actions were not taken before the end of the tax year, or the end of your business trading year.

Note: Any reference in this publication to a “spouse” applies equally to members of a civil partnership.

If any of the issues we describe are relevant to your circumstances and we haven’t already addressed these, please contact us immediately. There really is no point in closing the stable door after the horse has bolted…

 INDEX                                                                                                                                                                           

 Page number
BUSINESS OWNERS INTERIM REVIEW 2023-242
Business profits review 2023-242
Business profits – interim review checklist 2023-243
Business tax interim review 2023-244
Self-employed interim tax review check list 2023-245
Limited company interim tax review check list 2023-246

 Business owners interim review 2023-24                     

 BUSINESS PROFITS INTERIM  REVIEW 2023-24                                                                                            

The check list that follows this introduction is relevant for any business structure: sole trader, partnership or limited company. Where there are ideas listed that are only applicable to one of these three, this will be highlighted in the text.

The aim of this area of year-end planning is to consider factors that you have some measure of control over, and that will enable you to either reduce or increase your published profits for the year under review.

This may seem to be counter intuitive? How can you effect levels of profitability? Isn’t this determined by market conditions?

We shall see…

However adept you are at keeping your accounts it is likely there are inaccuracies in your numbers that will have an impact on the amount of profit or loss you believe you have achieved.

We are not suggesting that you artificially adjust your figures, far from it. The prime aim of pre-year- end planning is to seek out your true financial position and then consider what can be done to improve your position BEFORE the end of your trading period.

If you wait until after your year-end, remedial action may be timed out.

The benefits of profit planning prior to your trading year-end can be summarized as follows:

  1. An opportunity to arrive at a realistic estimate of profits for the current financial year.
  2. A chance to make decisions based on this estimate that will benefit your longer term goals.
  3. Time to consider the effects of the current year’s performance on your business investors, your bank, your staff.
  4. It also flags up the ability of your business to sustain your current and future remuneration and withdrawals from your business.

Another word for planning is forethought.

If you don’t plan your business future, you are apt to end up considering the reasons why things have not worked out as you expected – you will stare at the open stable door, and the empty stall, and wonder why you never repaired the lock.

 BUSINESS PROFITS INTERIM REVIEW CHECKLIST                                                                                      

ACCOUNTS accuracy:

  • Make sure you have depreciated your fixed assets, equipment and vehicles, at a realistic rate. You don’t want the written down value of your assets to exceed their market value.
    • Write off any bad debts and make specific provision for any doubtful debts.
    • Write off or write down any slow moving or obsolete stock. Consider an on-site auction or similar to get rid of it.
    • Make sure that you have not capitalised any replacement equipment that should have been written as repairs, or written off equipment purchases that should have been capitalised.
    • Take a good look at your cut-off procedures. Are all your supplier invoices received and posted? Have you invoiced customers for work you have not delivered yet?

PROJECTIONS TO THE END OF YOUR TRADING YEAR:

  • Base your sales projections on known factors: orders received, consistent with past or repeat sales.
    • Base you cost projections on current fixed costs, rents, wages and salary costs, and additional costs that you feel need to be included. Be realistic.
    • Factor in expenditure on capital equipment that you feel must be acquired to maintain sales or production at the required levels.
    • Make sure that apart from creating profit and loss and balance sheet forecasts, you also prepare a detailed cash flow forecast.

CONSIDER THE RESULTS – do they:

  • Show an overall improvement or worsening of your financial position.
    • Reveal a healthy cash flow.
    • Point to deteriorating market conditions, falling demand for your products or services. How will this affect your planning for the immediate future and your longer term goals?
    • Point to improving market conditions, rising demand for your services. Are you in danger of over- trading?
    • How will your business investors, your bankers, react to the projected results?
    • Is your business providing you with an adequate return for your capital invested in the business and are you properly remunerated for the time you spend in the business?

ACTION PLAN:

Based on the answers to these bullet points you will need to draw up an action plan which we can help you with. We can also help you with identifying the many ways to increase your profits.

Included in this will be scrutiny of your business tax position – consideration of these tax issues are listed separately in the following section.

 BUSINESS TAX INTERIM REVIEW 2023-24:                                                                                                   

THE BASICS:

Whether you have your own company (or trade as a sole trader or partnership) your periodic business tax payments will always be based on yearly trading profits and other chargeable gains made in the same period.

If you run your business through a company, corporation tax is payable on adjusted business profits (after allowances for capital purchases), nine months and one day after your year-end date. Accordingly, corporation tax for the accounting year to 31 March 2024, will be due for payment 1 January 2025.

To help cash flow, you could transfer between 15% and 20% of your monthly profits to a deposit account to reserve for this liability.

If you are self-employed, your business profits will form part of your self-assessment tax return. The amount of tax you will pay is split into two instalments on account, and a balancing adjustment if necessary. Remember you’ll be taxed on what you make not what you take out of the business.

In order to reserve cash for your self-assessment tax payments, the mathematics are more complex. Your best option is to deduct £1,000 per month (being your approximate income tax personal allowance) for each business partner, from the trading profits you make, and apply 30% to what’s left. Transfer this amount to a deposit account. However, this will only provide the funds to pay tax on your business profits. If you have other taxable income this will need to be factored in.

PRE YEAR-END TAX PLANNING:

If you have a good set of management accounts, for say the first three quarters of your trading year, and a realistic projection for the year, then you can sit back with your trusted tax advisor and consider your options.

Whatever your business structure, tax due on business profits needs to be paid at some future date. Pre year- end tax planning gives you adequate time to estimate your future liabilities and reserve funds to pay the bill…

A word on VAT for smaller businesses:

Both self-employed business owners and companies should consider their options if registered for VAT. If you presently use the standard scheme you may be advised to take a look at the VAT special schemes. These include: Cash Accounting, the Flat Rate Scheme, and Annual Accounting. As suggested there are turnover limits that will preclude larger organisations benefiting, but smaller businesses may be able to secure cash flow benefits and a possible reduction in their overall VAT payments. It’s worth checking this out.

The check lists that follow have been split into two: the first for self-employed business owners (sole traders or partners), and the second for limited companies and their directors. The suggestions will impact income tax, NIC and corporation tax payments.

 SELF-EMPLOYED INTERIM TAX REVIEW CHECK     LIST 2023-24:                                                             

  • The income tax you will pay for 2023-24 will based on your profit, or share of profits for the trading year ending in the 2023-24 tax year. However, you will have made two payments on account for 2023-24 (January and July 2024) based on your profits for the preceding year. Accordingly, if your profits are increasing you will likely have underpaid tax for 2023-24 and any balance owing will be payable 31 January 2025. If your profits are decreasing, you can elect to make smaller payment on account. Either way, having your estimated trading figures available, to forecast your 2024 tax payments, means you have ample time to request reductions in payments on account or save to meet any balance due January 2025.
    • Every self-employed person is entitled to earn £12,570 during 2023-24 without paying income tax. If your projected profits (or share of profits), assessable in 2023-24, are lower than this amount your personal tax allowance (or part of the allowance) may be wasted. To avoid this, you can defer claims for capital allowances, or perhaps defer refurbishment or other non-recurring costs to increase your taxable profits, and fully utilize your personal tax allowance. These adjustments will tend to push tax relief on deferred expenditure into future years.
    • If your share of profits looks as if it will breach one of the thresholds and push you into higher, marginal rates of tax (for example: loss of child benefit if income exceeds £50,000, loss of your personal allowance if your income exceeds £100,000). To counter this risk, you could consider bringing forward capital investments, in plant, equipment or commercial vehicles and claim additional capital allowances; thus reducing your profits (profit share) and avoiding the punitive marginal rates of income tax.
    • In planning for tax payments, based on profits assessable for 2023-24, business owners should be aware that generous tax allowances are still available for qualifying capital expenditure. In particular, the Annual Investment Allowance allows you to claim a 100% write off for expenditure after 1 January 2023, up to a £1,000,000 limit. This is a useful adjustment device to reduce taxable profits and save tax, whilst maintaining published profits in your profit statement.
    • If, you are able to make a hefty claim for investment in qualifying equipment, and as a result your profits are much reduced, or if you are forecasting low profits or a loss, you may want to consider a protective application for tax credits. When your self-assessment numbers are subsequently filed for 2023-24, you may qualify for a tax credit payment, especially if you have a large family.
    • Class 4 National Insurance is based on the level of business profits: 9% on profits between £12,570 and £50,270, and 2% on profits over £50,270. Any reductions you can achieve in your taxable business income will also reduce this significant NIC charge.

And don’t forget, you pay tax on the profits you make, not the drawings you take from your business!

 LIMITED COMPANY INTERIM TAX REVIEW CHECK LIST 2023-24:                                                                      

  • Incorporated businesses are taxed at corporation tax rates, currently 25%, if taxable profits are below £50,000 the small profit rate of 19% applies and there is a marginal relief where profits are between £50,000 and £250,000. Any profits retained in the business will be subject to no additional tax charge. This final point illustrates one of the major advantages of running a profitable business inside a limited company structure. If you are self-employed you may want to consider the benefits of incorporating your business.
  • Shareholders should review any plans in place to deal with succession, especially, smaller family businesses. This review should consider personal circumstances, changes in the company’s financial status, and changes in tax legislation.
  • Every year shareholders should also review shareholder agreements to ensure they still reflect the intentions of signatories as any changes may impact on future CGT & IHT.
  • The dividend allowance has been reduced to £1,000 in 2023-24. Would it be possible to issue shares to adult children and provide them with a tax- free income?
  • Review the active participation of director/shareholder family members. Is there an opportunity to genuinely employ a spouse or child; or provide them with taxable benefits?
  • Directors who have overdrawn their loan accounts with the company should consider taking a dividend to clear the loan (if reserves are available) or otherwise repaying the loan within nine months of the trading year-end. In this way the additional (albeit temporary) 33.75% corporation tax charge can be avoided.
  • Directors with semi-permanent deposits on loan to the company, may be advised to charge the company a limited amount of interest to use up the new tax free investment allowance. Basic rate income tax payers can receive up to £1,000 and higher rate tax payers £500.
  • The tax on-costs of running a company electric car fleet – class 1A National Insurance for instance – as well as the not inconsiderable tax implications for participating employees, may provide sufficient justification for a change in strategy. For example, could the company lend employees funds to buy their own cars and pay them a tax-free business mileage allowance to cover running costs?
  • If projected profits forecast a temporary dip, or a loss in the short-term, could the company’s accounting period be extended to embrace the loss and average down the taxable profits for the preceding period?
  • If projected profits are forecasting a downturn in profits, how will this affect director/shareholders’ remuneration in the coming months; will there be sufficient retained profits to maintain regular dividend payments?
  • Be sure to consider the funding of corporation tax payments that will need to be made nine months and one day after the company’s accounting year-end date.

To discuss any of the above points contact us at

Phone: 02882840162

Email: info@adpottie.co.uk

Disclaimer: We have used reasonable care and skill in assembling the information in this document. Information or advice implied cannot be tailored to all personal circumstances or particular situations. There may also be factors relevant to your particular circumstances which fall outside the scope of some or all of the information disclosed. Accordingly, this material does not constitute personal advice. You should not rely solely on this material to make (or refrain from making) any decision or to take (or refrain from taking) any action. Legislation changes frequently and any material in this fact sheet covers all known changes to the date of publication, 2 March 2024.

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