04.03.2009

Tax advice to help you to defend profitability in difficult trading conditions.

Effective tax planning in a recession

Click on the links below:

1. Consider reducing 2008/09 payments to account
2. Consider ways of reducing taxable profits
3. Receiving rent from property held as 'stock' needn’t necessarily mean that the property has been transferred to 'fixed asset investments' (note: if it is transferred, a tax charge triggers).
4. The Revenue’s new Business Payment Support Service
5. Can any advantage be taken of falling/low asset values?
6. VAT reclaim opportunity. Deadline 31 March 2009. VAT News: click here

Don't miss the Tax Update session at Financial Insights 2009 - defending profitability in difficult conditions. Click here for more information.

1. Consider reducing 2008/09 payments to account

Payments to account of an individual’s 2008/09 income tax liability are made in two equal instalments on 31 January 2009 and 31 July 2009; and are automatically based on the individual’s 2007/08 tax liability.

The self-employed: sole-traders/partnerships

If the trading results for the accounting period ended in 2008/09 are expected to be lower than the results for the corresponding accounting period ended in 2007/08, then consider reducing the 2008/09 payments to accounts.

A claim to reduce payments to account can be made at anytime and so if the 31 January 2009 instalment has already been paid based on the 2007/08 tax liability, a claim can be made at anytime after 31 January 2009 and it will generate an immediate repayment of part or all of the 31 January 2009 instalment – you don’t have to wait until the 2008/09 tax return has been submitted.

The employed/retired

The same principle applies to other forms of income received and so where that income is “recession sensitive” eg: bank/building society interest; dividend income, then consider reducing the 2008/09 payments to account that require to be made toward the higher rate tax payable on that income.

Both

For both the self-employed and individuals, consider their tax positions after 6 April 2009 but before the 31 July 2009 second instalment payment date, because by then it may be possible to estimate with reasonable accuracy the client’s 2008/09 income so that, if need be, the 31 July 2009 payment can be reduced accordingly.

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2. Consider ways of reducing taxable profits

• For the self-employed, consider bringing forward the year-end to a date earlier in the tax year to get a quicker reduction in on-going tax liabilities on reducing profits; or extend it to bring in losses. The impact, however, will depend on available overlap relief.
• For a company, extending its accounting period to accommodate losses or write downs/further provisions may allow losses to be offset quicker against previous year profits; or may reduce profits that are taxed at a higher rate.
• Work-in-progress and stock may need to be valued more conservatively.
• Bad debt and credit note provisions may need to be increased.
• Purchased goodwill or intellectual property may need its carrying value reduced.

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3.  Receiving rent from property held as 'stock' doesn’t necessarily mean that the  property has been transferred to 'fixed asset investments'.

Where property is shown in the accounts as stock held for resale, but the owner decides to hold it as an investment, then the normal accounting treatment will be to transfer the property  from “stock” to “fixed asset investments”. There is, however, a significant tax downside to this:  the property is treated, for tax purposes, as transferring at market value and so a tax charge is  triggered even though no proceeds have been realised to pay it.

Though the receipt of rental income is usually an indicator that a property has bee transferred to “fixed asset investments”, the current downturn in the property market means that properties  that won’t sell, are having to be rented out in order to generate cash.

Where that is the case, consider keeping the property in “stock” to avoid triggering a tax charge, but include a comment to this effect in the Directors’ Report, otherwise the Revenue may contend that the property has, in fact, transferred to “fixed asset investments” notwithstanding its treatment in the accounts, meaning that a tax charge has triggered. 

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4.  The Revenue’s New 'Business Payment Support Service'

The Business Payment Support Service was introduced 24 November 2008 and is being offered by the Revenue to companies and individuals who are having difficulty in meeting their tax liabilities as a result of the economic downturn. The taxes included are: income tax; corporation tax; PAYE; National Insurance; and VAT.

The key is to approach the Revenue as soon as possible and if they agree to entering into a “Time-To-Pay” arrangement then although interest will be charged on any tax payment after its  due date, the Revenue won’t charge any late payment surcharges (including VAT surcharges) or penalties. 

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5. Can any advantage be taken of falling/low asset values?

Tax planning involving transfers of assets (eg outright gifts, transfers in or out of trusts etc) is  often inhibited because of the inherent gains that will crystallise on transfer, based on market  value. If the asset’s market value has fallen, then now may be the time to consider whether  such transfers can be made either without triggering a tax charge, or triggering a more  “acceptable” tax charge.

Also, extracting cars from company ownership into the employee’s/director’s personal ownership triggers a benefit-in-kind income tax charge based on the market value of the car, but  the rapid fall in the market value of expensive cars may mean that this is a good time to do so.

For more VAT savings opportunities click here

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