So with just over a month before 5th April 2019, my thoughts are drawn to another looming deadline apart from the Brexit countdown clock, the end of the tax year 2018/19!
So I’ve identified some opportunities for some pre year end tax planning you or your business can take advantage of to save some tax before the new tax year.
Here are some ideas then whether you are a limited company or a sole trader/partnership.
1. Capital expenditure
This regularly comes up in client conversations as to what exactly capital expenditure is. And of course when it’s anything tax wise, it’s not straightforward. The general rule is any expenditure that enhances the value of the business. For example buying a new laptop to replace an old one for your business is treated as like for like replacement and therefore is an expense through your profit & loss account and you get the tax expense straightaway.
But if the business was to purchase a whole new IT suite and it’s own server facility which is going to be a significant investment in the business, then that would be treated as capital expenditure and the total amount of spending will be treated as an asset in the balance sheet and depreciated over a number of years.
This is where capital allowances in tax come into play. The good news is that the annual investment allowance (AIA) which applies to all plant & machinery, fixtures and fittings excluding motor cars, has now been increased to £1m from 1st January 2019 for 2 years.
So this means there is an opportunity if your business is considering significant capital expenditure to claim the full amount up to £1m against your profits. This can create a taxable loss also for your limited company or sole trader business which can be used in a number of ways.
There are different rules for buildings and cars however so it’s a good idea to check with your first whether the expenditure you are considering qualifies for AIA.
Only brand new cars (from 6 April 2018) with 50 g/km Co2 or less qualifies for a first year allowance so cars aren’t great for capital allowances. But a van is treated differently as this is treated as plant and machinery and the full amount (net of vat if you are vat registered) can be offset against your taxable profits.
For example if you are a limited company with a profit of £20,000 and you buy a van for the business worth £20,000 then you can offset this in full against your profits and reduce your corporation tax liability to nil, effectively saving 19% corporation tax on the £20k, £20,000 @ 19% = £3800.
A sole trader will save on the income tax and class 4 national insurance so the tax saving in the basic rate threshold up to £34,500 is effectively 29% (20% tax plus 9% class 4 NIC).
Importance of timing
What’s really important then is the timing of the expenditure. If your business is thinking of capital expenditure in the next 6 months, then there is a benefit in bringing forward that investment prior to the new tax year or 31 March 2019 if you are a limited company. That way you can bring forward the tax benefit. Also it’s important to point out that you don’t necessarily have to pay for the capital expenditure before those dates. For capital allowances tax purposes the tax benefit can be realised when payment becomes unconditional, for example if you are buying a van on hire purchase, the agreement could be signed by you on 31 March 2019 and the first payment coming out 30 days after and you would be able to get the tax benefit in your 31 March 2019 accounts. This is because the agreement to pay becomes unconditional effectively when you sign the agreement.
That’s why it’s a good idea to bring forward expenditure if you are considering it prior to the 5 April 2019 so you get the advantage of the tax deduction now rather than later.
New allowance on commercial buildings & structures
A new allowance was introduced for costs incurred after 29 October 2018 on expenditure on commercial buildings such as offices or in agricultural business, items such as sheds or houses for animals.
This allowance gives 2% of the qualifying costs per annum on a reducing basis to be offset against profits. Prior to this none of this qualified only for a few not that common exceptions so this is a welcome reintroduction to capital allowances as there was a regime before for industrial and agricultural buildings which was scrapped. Residential buildings do not qualify.
Another good tax planning opportunity prior to the end of the tax year is to invest some spare cash into your pension. In basic terms currently, if you are a basic rate (20%) taxpayer for every £80 you put into your pension, the government contributes another £20. If you are a higher rate taxpayer (40%) then for every £60 you put in you can get £100 into your pension as there is additional tax relief available for higher rate tax payers.
Therefore it is a good idea to think about some pension contributions prior to the 5 April 2019 depending on your circumstances. One person put it to me that it is like “writing a cheque to your future self” which I thought was a good way of thinking about it.
For limited companies, it can qualify for staff or directors as an expense in the company and therefore every £1000 contributed will save 19% corporation tax (£190) as long as it is paid out of the bank of the company into the pension scheme for directors or staff before or on 31 March 2019, you cannot accrue pension contributions into a limited company.
There is annual limit of £40,000 you can contribute however and for a limited company you cannot use this an excessive amount to pay for pension contributions, for example if the company had a profit of £50,000 HMRC could challenge a company that paid £50,000 in pension contributions for the directors as being excessive.
With pensions it’s always a good idea to speak to your financial advisor for advice on this also as to setting up a pension scheme or how it is going to be invested.
3. LISA, ISA and gift aid
There are other investments such as EIS ( enterprise investment scheme) SEIS and VCT (venture capital) which attract tax planning opportunities but also attract some risk to the investments as they are generally to riskier start up/high growth companies. Again a conversation with your financial advisor would be recommended if you want to investigate these further.
For any parents who have grown up children saving for a house, the new LISA allows them to contribute to this and for every £4000 per year invested the government contributes £1000 per year. This can be setup for anyone up to the age of 40 so it’s a good idea to set this up before you reach this age as it can’t be setup after this and you don’t have to contribute every year.
This can be used at a later stage as a first time buyer to put towards the deposit on a property. The ISA limit is currently £20,000 per year so you may want to invest more into this and use up this allowance before the end of the tax year.
Gift aid to registered charities operates similarly to pensions in that they increase the basic rate band for higher rate tax payers and so you can make contributions to your designated charity prior to the end of the tax year and claim this in your tax return when it is filed to get tax relief if you are a higher rate tax payer and you can also carry back gift aid to 2017/18.
There is also a new relief for investments into Social Enterprises which gives 30% income tax relief up front which could be worth investigating if you are considering a donation to this type of organisation.
4. Capital gains
For capital gains you have an annual allowance of £11,700 in 2018/19 so can use this allowance against any assets that are disposed of prior to 5 April 2019.
Transfers between husband & wife are exempt from capital gains so it may be an opportunity prior to the tax year to review the assets held and move these to the person with lower income of the two or if it is an asset held in one person’s name and you are thinking of selling it, then move it into joint names before selling it as that will attract another capital gains allowance of £11,700 for the other person when selling it which can save a few thousand pound depending on the size of the disposal.
It’s a good idea to have a chat with your accountant before making any capital gains tax plans as nothing can be done after the disposal is made.
I hope that helps with some ideas for tax planning prior to the 5th April 2019, as always in tax there are exceptions to rules and so I have tried to provide a general guide here, please feel free do discuss any options further with me or have a chat with your financial advisor on the pension planning for example.