Can you save some tax?

January is a great month for planning. Hopefully you came back from holiday suitably refreshed and with grand ideas on what you want to achieve in 2011. In the last blog we looked at setting personal and business goals. This time I want to talk about tax planning.

No matter how big or small your business it’s a great idea to have a look at this well before the end of the tax year on 5 April 2011 and at your accounting year end, if they're not the same. The very nature of tax means it is almost impossible to rearrange your tax affairs retrospectively.

So what can you do instead? Start planning now! If you’re a client we’ll be sending you out a Tax questionnaire so we can have a look at your options for you.

Generally there is something that can be done for a lot of sole traders, partnerships or directors to save them some tax. Sometimes it’s just looking at the timing of things you were planning on doing anyway to ensure you get the relief as quickly as possible eg a new van or bit of equipment, employee bonus etc.

It’s also possible to do some of this tax planning in conjunction with other things like tax credits. To give a simple example -  if you are a sole trader and normally you have a profit of £30k. You need a new van costing £10k and because of the Annual Investment Allowance the £10k would drop your taxable profit to £20k. You may then find that you’re eligible for tax credits due to your drop in normal income. You would also save on tax. The van could be paid for by loan and you would still get all the tax advantages upfront.

Here are a few more ideas:

1. If you are considering significant capital or revenue expenditure during April 2011 or later in 2011 you may want to see if you can bring the payments forward and claim tax relief in the accounts to March 2011. This may involve you funding the payments earlier but you may possibly benefit from reduced tax bills a year earlier.

2. Following on from point 1, there are still generous capital allowances for purchases of equipment that qualify for the Annual Investment Allowance. The annual limit is set at £100,000 until April 2012 when it will be reduced to just £25,000.

3. If you are carrying stock on your balance sheet at cost and it is now worth less than cost, you should revalue, reducing the stock to its current realisable value. This will reduce your trading profit in the current year or increase your losses; it will also reduce your tax bill or increase any loss relief carry backs.

4. If you are considering the sale of a business or business property that will create a chargeable gain for capital gains tax purposes, you might be advised to delay contracts until after the 5 April 2011. For individuals, any tax payable on gains made on or after the 6 April 2011 will not be due for payment until 31 January 2013. Tax payable on gains on or before 5 April 2011 will be due for payment a year earlier, 31 January 2012. At present CGT rates are still 18% or 28%. Also if your gain qualifies for Entrepreneurs' Relief your CGT liability will be reduced to 10% of gains - up to a lifetime maximum of £5m chargeable gains (for disposals after 23 June 2010). Of course it is always possible that capital gains tax rates will be increased in the 2011 Budget.

5. Consider your pension options. Could you make additional contributions before the 6 April 2011 to reduce your higher rate tax this year? But beware of the anti-forestalling provisions if your income is more than £130,000.

These examples are only given as guidelines and shouldn't be taken as advice. I have no way of knowing individual circumstances.

There are several other ways of planning for individuals and directors too. However tax is very complicated and there is a lot to take into consideration when doing any planning. In fact if you are not a tax expert it’s often a case of  ‘its not what you know you don’t know, but rather what you don’t know you don’t know’

If you’re not a client and you would like me to carry out a review for you then please email me at gloria@murrayassoc.co.uk and I’ll send you out a Taxability questionnaire. We normally charge £350 + VAT for this but I will waive this fee for the first 10 completed questionnaires I get back. Get planning and save yourself some tax!