Year end tax planning for businesses

Croner-i, Accountancy Daily Lets consider the key year end business tax planning priorities for owner managed businesses and companies from trade receivables to cash flow and provisions to directors' loans

The most popular choice of accounting period end for companies is 31 March. Many unincorporated businesses also use this date, or 5 April – particularly following reform of the basis period rules from 2024–25.

As such, now is an appropriate time to take stock of your company’s tax position. This article covers business tax considerations, but not necessarily those of the owners, which should also form part of year-end tax planning.

Current year considerations

Consideration should be given to whether it is possible to either defer income into a future period, accelerate deductible expenditure into the current period, or both.

Obviously, either of these will have knock-on implications for the results of future periods.

Whilst deferring profits to a future year can provide a cash flow advantage, the rate(s) of tax payable in future periods should also be considered.

If this were to increase, this would be an absolute cost to the business, and vice versa. The ability to defer profits will be constrained by the applicable accounting standards, as tax computations must always be based on GAAP-compliant accounts.

For businesses using the accruals basis of accounting, the business should undertake a review of its trade receivables ledger and consider whether any of the amounts are now (or are likely to become) irrecoverable.

Tax relief is generally available for writing down or formally releasing third-party trading debts. Where the debt is with a connected company, relief should be available for a sole trader (but the associated credit will be taxable for the company). Relief will not be available for a corporate creditor (nor will the credit be taxable in the debtor company).

If the business may have an obligation to make a payment post-year end, it may be appropriate to include a provision within the accounts for this amount.

The creation of a provision will be a tax deductible expense where the accounting conditions for recognising a provision are satisfied and the provision does not conflict with any of the tax deductibility rules. Where the accounts are prepared on the cash basis, no provisions will be possible (or required) as only income actually paid out is included within the accounts.

Any pension contributions that relate to the period but are not paid before the end of the period will not be tax deductible in the period.

Where the business prepares accounts on the accruals basis, a tax deduction may only be claimed for salary costs relating to a particular period only if the salaries are paid within nine months of the end of that period.

Taxable profits for the period could be reduced where qualifying capital expenditure that is due to be incurred after the year end is brought forward.

Where the business uses the cash basis, a deduction for the business proportion of the asset will be available in the year of expenditure with the exception of cars and buildings.

Where the business uses the accruals basis (or for cars and buildings for businesses using the cash basis), this will enable the company to claim capital allowances earlier than would otherwise have been the case.

Paying interest on loans received from the company’s owners will reduce the company’s taxable profits. It is not possible for a sole trader or partnership to borrow money from the owner(s) – this will be treated as capital of the owner(s).

However, if the company is a close company and the loan has been received from a participator, in order to be tax deductible in the current period, the interest must be paid within 12 months of the end of the period.

Where a participator in a close company has borrowed money from the company and this remains outstanding nine months after the year end, a tax ‘deposit’ of 33.75% of the outstanding amount must be paid to HMRC.

All compliance and payment deadlines should be noted – including those which may arise after the year end.

There will be income/corporation tax payment and return filing deadlines, payroll and other employer compliance (P11D, employment-related securities, enterprise management incentives (EMI): 6 July, and PAYE settlement agreements (PSA): 22 October) deadlines and there may be personal service company deadlines to be met.

If the business operates as a partnership, the period’s profits must be allocated between the partners. Whilst this will follow the allocation set out in the partnership agreement, there is the opportunity to amend these allocations prior to the year end. Amending the allocation may be more tax efficient for the partners, particularly if they are related.

If the results for the period are likely to produce losses, the options for tax relief for these losses should be reviewed and considered, to determine whether there is any related planning which can be undertaken before the year end.

There are a number of potential claims and elections which can be made in respect of each accounting period. These generally must be made within either two or four years of the end of the accounting period (for a company) or the second 31 January following the end of the tax year or four years from the end of the tax year (unincorporated businesses). Any relevant claims and elections should be noted and monitored.

Prior year considerations

The latest date by which a tax return (whether corporate or personal) can be amended is normally 12 months from the due date for the return – not the date on which it was filed. As such, prior to each year end is an appropriate time to consider which previous tax returns remain ‘open’ for amendment and whether there is anything which needs/can be done to improve the tax position. For example, additional claims for relief may be appropriate.

In addition, it is the appropriate time to ensure that claims or elections have been made and do not need to be varied or withdrawn, as most of these need to be made within a tax return.

If there are trading losses arising in the current period, these may be able to be carried back to a previous period and generate a repayment of tax already paid.

Sole traders, partners and companies can generally elect to carry trading losses back 12 months from the beginning of the period of the loss.

Sole traders and partners are not required to set the loss against their other income of the current year before doing so. Companies, however, do have to do so.

Aside from providing a cash flow advantage, this can provide an absolute tax saving if the rate of tax was higher in the previous year.

Where a loan has previously been made to a company participator and remains outstanding, such that a tax ‘deposit’ has been paid over to HMRC, repaying this before the current year end will result in the tax deposit being repaid a year earlier than if it is not repaid until the following year.

Future considerations

The following year’s budget should be reviewed to determine to what extent a taxable profit is expected in the coming year. The budget should also include a robust tax forecast.

This is particularly important where a company is at risk of being required to make corporation tax payments by instalment (or is moving from being ‘large’ to being ‘very large’).

Moving from paying tax nine months and one day after the year end to having to make tax payments during the year is often overlooked by businesses and advisers, and presents a cash flow challenge for the business.  This means the business could now have to make at least one tax payment for the year that is about to begin before they make their tax payment for the year which is just about to end.

Disallowable expenditure is a cash outflow for the business for which they do not receive tax relief. This should be reviewed from both a tax and financial standpoint.

For example, is the business overspending on client entertainment compared to the business benefit. Reducing this expenditure will increase profits with no corresponding increase in tax liability.

There are myriad other future situations where tax will be an important consideration. The important point is that tax should be considered early in the process.

About the author

Graeme Connell CA CTA is a regular contributor to Croner-i