Friday, September 19, 2008

Tax planning for the Credit Crunch

Like it or lump it, times are difficult at the moment and there’s no getting away from it – not unless you have a media blackout.

So we came up with a few tips so you can start planning now for the ongoing effects of the credit crunch.

Falling profits inevitably result in lower tax payments. If you’re a sole trader or partnership you should start thinking about reducing your self assessment tax payments due at the end of January next year – particularly as they may be based on last year’s higher profits.

However, you should be aware that the taxman will charge interest if it turns out you haven’t paid enough tax on time so make sure that you get your profit projections right.

Is there any way I can reduce my taxable profits?

Well if you’re a sole trader or partnership you can think about changing your accounting date to one later in the tax year – this may allow you to get a quicker reduction in ongoing tax liabilities for declining profits.

The flip side of course is it could accelerate tax liabilities when and if your profits start rising again.

What if I trade through a limited company?

You can extend the company’s accounting period so as to accommodate any losses/further provisions arising after the normal accounting date.

This may enable losses to be offset against profits made earlier on in the same accounting period or reduce the overall profits, which were possibly taxed at a higher rate.

What if I’m just about to start a new business venture?

Think carefully about your choice of business vehicle because, despite what the man in the pub says, trading as a limited company is not necessarily the be all and end all.

A limited liability partnership may be a more viable alternative as it can give commercial protection in this current difficult climate.

If you trade as a partnership or sole trader and make losses in the opening
year(s) of your trade you should be able to relieve those losses against your income for earlier years – this option isn’t available if you run your business through a limited company.

But beware – if you decide to trade as a partnership you must make sure that all partners are active in the business and that the loss claimed by each individual partner does not exceed their capital contribution.

If matters are not structured properly, then the Revenue will most likely deny your loss claim leaving you even more out of pocket.

What about extracting profits from my company?

Well dividends are still the most tax-effective way of extracting profits from the company, though company law dictates they must be “legal” so make sure you have enough reserves to pay them. Care also needs to be taken that a collapse in trading results in the later part of your accounting period does not render previously paid dividends illegal.

Finally what about VAT?

If you’re a small business (i.e. your VAT exclusive turnover is less than £1.35 million) then consider adopting the cash accounting scheme for VAT purposes.

This may be of benefit where late payment of your sales invoices results in you paying VAT to Customs potentially when you haven’t even received the money in the same VAT quarter.

Hopefully these ideas have given you food for thought though if you think we can be of any further assistance please give us a call.


Emily said...

Thanks for the really useful post Shaun - particularly interested in the bit about dividends. I think we can do something with that to help reduce our tax.

Personal Tax Planning said...

Many thanks for sharing this informative post. I think hiring an expert to prepare your return is a small annual investment that can pay off big.