I’m never impressed by anyone who tells me they have no tax to pay. It speaks volumes.
We’ve all heard it before. The ‘friend down the pub’ who’s not paying any tax; let’s call him Dave. He tells you of some wizardry performed by his accountant which has ensured that he’s got no tax to pay, despite him apparently having had a great year in business. He might even roughly try to explain how the wizardry worked, and how it’s saved him a fortune. Less money for the tax man. More money for Dave’s business. Happy days, it seems.
Well, Dave’s a bullshitter.*
*Even though he might not know it.
The truth is, there are generally just two reasons why businesses don’t pay tax:
- They’re not making any profit in the first place.
- They’ve spent all of their profit.
Long term, both are serious. The first will be noticeable in the here and now. The second will eventually catch up on them, as cash will eventually run short.
I’m never impressed by anyone who tells me they have no tax to pay. It speaks volumes. And unless it’s part of a longer term reinvestment/growth plan, and is therefore just a short term strategic blip, it’s not something to be shouting about down the pub.
Fundamentally, paying tax means you’re making profit. And making profit is the only way to create funds for growing your business.
Overall, you’ve now spent over £90k, compared to the original £50k tax bill you had in mind.
The wise man’s tax bill
If your business has, say, an expected tax bill for the year of £50,000. You’d be forgiven for thinking that spending £50k on a new piece of equipment would wipe this out.
Sadly, this is not the case.
For each £100 spent, you only save £19 of Corporation Tax. Therefore, by spending that £50k, you only save £9,500. There’s still over £40k of tax to pay! £50k spent on equipment. £40.5k due in tax. Overall, you’ve now spent over £90k, compared to the original £50k tax bill you had in mind.
Sometimes, it’s worth just paying the tax bill, and keeping more money in your bank for future reinvestment in your business.
After all, Cash is King.
Are there any exceptions?
Yes, there sure are. And as we’re approaching the 31st of March – a common year end for most companies – we thought it was a good time to run through them.
When factoring in the company’s longer term strategy, there are a few angles, and tax planning methods, which we commonly bring into play.
Pensions
Sometimes an eye-rolling subject. But a super neat method of squeezing down the tax bill, whilst still having the ability to use the funds as part of the company’s growth strategy.
Stay with us…this isn’t all dry.
Effectively, the £40k that’s now in your pension pot, has only cost you £32.4k.
You can pay up to £40k each year into your pension, as an employer’s contribution from your company. This is like you just moving your money from one pot into another – rather than paying it to somebody else. However, the whole of that £40k will be a tax deductible expense for the company.
£40k of cash moves from the company, and the company gets a reduction in its tax bill of £7.6k.
Effectively, the £40k that’s now in your pension pot, has only cost you £32.4k.
Now generally that money is stuck in the pension until you’re 55. However, if you have an existing commercial premises, you have the chance to be a bit clever...
Once your pension pot has built up sufficient funds, it could buy some or all of this premises through a Self Invested Pension Plan (SIPP). In doing so, the cash which was in the scheme will be freed up again, and can be reintroduced to the business to assist with further growth and development.
If you’re just looking to buy a new commercial premises from a third party, the SIPP can still buy some or all of it, using the cash it holds.
Either way, once you have the property in the SIPP, your company then pays a rent to the pension each year (as the SIPP is effectively the landlord of the property which the company occupies). This saves further tax on the rent payments. And you can still keep paying up to the maximum pension contributions of £40k per annum, if profits and cash permit.
You can’t purchase residential properties within a SIPP, but it’s a very handy piece of efficient planning where non-residential properties are involved.
Now, getting the SIPP set up takes the assistance of tax advisors/accountants, as there are initial tax planning considerations, and also might require a financial advisor & solicitor to help set up the scheme and associated paperwork.
But once that’s done, it runs pretty neatly. Best of all, everything which exists in your pension pot (cash, premises and other investments), can grow tax free!
We like that!
When to pay into the pension?
Pension payments cannot be backdated. No matter how nicely you speak to your financial advisor. What matters in HMRC’s eyes the date which the money hits the bank. It saves your company tax in the accounting year in which the money hits the pension fund’s bank account.
Give yourself 5 working days to ensure this money clears. And to be safe, make the payment 2 weeks prior to your company’s year end to guarantee getting your relief this year!
Key point: make sure it’s an Employer’s Contribution, rather than either a Personal Contribution or Employee’s Contribution.
Equipment
“But I thought you said not to invest in equipment, and just keep the cash instead?”
Ah yes. But only when the timing’s right.
Our issue is with people spending money on new pieces of equipment for the sole reason of saving tax. This doesn’t tend to make sense in the long run, and eventually leads to businesses which are squeezed of cash resources and the ability to grow and reinvest internally in a meaningful way.
However, where there is a new piece of equipment which the business genuinely needs in terms of its overall goals, and especially if it’s going to generate a return on investment, it makes sense to buy this prior to your year end.
Like the pension payments, and as touched on above, you’ll save tax of 19% of the net cost (excluding VAT) of the equipment. £100k spent; £19k saved.
When to do it?
It can be difficult to get an invoice backdated for equipment (wink wink), so to be safe, it’s worth ensuring you have all the paperwork dated in your company’s current financial year.
Keeping the timing close to the year end ensures you don’t have to wait for ages before you get the effective tax benefit of this relief.
Does it work for all equipment?
Unfortunately not. Machinery and vehicles (excluding certain cars) are generally pretty good for tax relief.
However, purchasing buildings or making capital improvements to your premises will generally not provide you with any tax relief against your taxable trading profits. Instead, you’ll only get tax relief when you come to sell the asset - or in some cases, sell the whole business.
Therefore it’s worth checking what you’re planning to purchase, and understanding the tax impact, so you can get clever with which capital investments to make and when.
Happy staff. Happy business.
Staff bonuses
When it’s been a good year and the tax man’s looking at taking a big slice of the pie, there’s no better time to have your staff share in the spoils they’ve helped create!
Thankfully, you have a little bit longer to decide how much to pay them; unlike pensions, this doesn’t have to be paid out prior to the year end. In fact, so long as you pay it before your company’s tax becomes payable (9 months after your year end), it will be able to be offset against the trading profits for that period.
For example, if you have a year end of 31 March 2022, you can draw up the final draft accounts for that period, and assess how much of the profits are being allocated as a bonus to the team. You can then pay this a few months later – say June 2022 – and it will still be able to reduce the tax bill on the 31 March 2022 tax return (payable by 1 January 2023). For round numbers, if you pay £30k in bonuses, you’ll save 19% in tax (£5,700).
Yes, there’s potentially National Insurance and Pension considerations on this – and therefore other bonus schemes might be worth exploring, such as staff share schemes and staff ownership, all of which have a whole bunch of other tax efficiencies which we’ll cover in another article.
The bottom line is though, HMRC like employers who treat their staff well, so they ensure you guys can tap into some benefits along the way.
Happy staff. Happy business.
Final thoughts
There’s other ways to chip away at the tax bill, but these three are our top picks for the pre year end planning in 2022.
So, as a key takeaway, we recommend you use the following three steps:
Check your management accounts for the year to date to see your profit thus far – these should be readily available from your finance department.
Using those, work with your accountant to see what your expected tax liability is for the year.
Put in place the tax planning method(s) which makes the most sense for where your business is going.
Clever tax savings, to create the funds you need to keep moving your business forward.
Hey, maybe our friend Dave was just paying out big bonuses after all?!
