Tax and VAT strategies for beating recession and the credit crunch
We seem to be coming to a break point in a long, sustained period ofgrowth in the UK. It's as if someone had pushed a button and notched upthe incline on the running machine - all of a sudden more effort isrequired to sustain forward momentum. We need to get financially fitter!
Part of this fitness regime needs to be a fresh look at the tax andVAT strategies that are available to slow down payments to the taxman.
It's beyond the scope of this article to give detailed advice, aseach business will have different needs. What we have done is outlinein general terms some of the strategies that are available - if we havenot reviewed your tax affairs recently please contact your PersonalAccountant to discuss things further.
VAT
The legislation that sets out the way in which you calculate theVAT to pay each quarter offers a number of opportunities to ease cashflow.
* Cash Accounting - if your VATable turnover is under £1.35mand you are not using cash accounting, now would be a good time toswitch. A few companies will not benefit, especially if you are paidfor the goods or services you sell at point of sale, a retailer forinstance. If you sell goods on credit and you are usually owed morethan you owe (to suppliers etc) cash accounting would probably reduceat least the first payment you make when you join the scheme.Essentially you only pay VAT when it is collected from customers.Outputs and inputs are based on monies received and paid, rather thanamounts invoiced.
* Flat rate scheme - another of the special schemes offeredto small businesses is the flat rate scheme. If your turnover is under£150,000 and you have small amounts of input tax to reclaim each month,this scheme may save you cash flow. Each business sector suffers adifferent rate of VAT so the only way to see if this scheme would bebeneficial is to crunch the numbers.
Even if you don't qualify for a special scheme, don't forget toclaim bad debt relief. Any debt that is over 6 months old qualifies asa bad debt and you can reclaim the output tax you will have paid.(Note: the flip side also applies. If you have invoices unpaid fromyour suppliers more than 6 months old, you should repay any input taxyou have claimed!)
It is also worth filing your VAT return online now as this will give you an extra 3 days to pay.
Making losses, or less profit
One of the more obvious effects of recession is a downward trend inprofit creation, and if your business is badly affected, making losses.The notes that follow set out a few ideas for capitalising on the taxplanning opportunities this affords.
1. Self assessment payments on account - if your currentyears profit is likely to be lower than the previous year, you may beable to elect to reduce the payments on account for the current year.The claim should be based on realistic trading results.
2. Losses - if your business is currently making losses itmay be possible to carry these losses back to previous years, when youmay have paid significant tax. Any tax overpaid as a result can bereclaimed.
3. Change of accounting date - in some circumstances it maybe beneficial to either extend or reduce a company's accounting periodend to make use of a fall off in profitability. There are limitationsto this type of planning so careful consideration of the facts isrequired.
Need more time to pay
Generally speaking if you are late paying your tax or VAT, interestand in some cases penalties will be applied. If you can justify thereasons for you inability to pay it is usually advisable to contactHMRC and agree a payment timetable that your cash flow can afford.Burying your head in the sand is not a useful strategy!
If your business is starting to feel the pinch, pressure on profitsand cash flow, please seek the advice of your Personal Accountant. Asmentioned at the beginning of this article each business is unique andthere are a number of strategies we have not had the space to showcasein this article. Please call if you need help.
Overdrawn directors' loan accounts
If you are a director it is illegal for you to borrow money fromyour company. Ironically there are no fines payable if you break thisparticular aspect of company law! However there are a number of taxconsequences, two of which are outlined below.
Benefits in kind
If a director's loan is overdrawn (you owe the company money) youwill be deemed to benefit from this arrangement and suffer a benefit inkind charge as a result. This charge can be avoided if you allow thecompany to charge you interest on the overdrawn position. This will ofcourse increase the amount you owe if simply charged to your loanaccount and will potentially increase the company's taxable profits.
Corporation tax
If the overdrawn position continues for more than 9 months after theend of a relevant accounting period your company's corporation tax billwill be increased. For instance if the company year end was 31 December2007 and at that time the overdrawn director's loan amounted to£20,000, and this amount was still outstanding at 1 October 2008, youwould have to pay over an extra £5,000 in corporation tax at that laterdate. This section 419 liability could be reclaimed if the loan wassubsequently repaid - but there would be a considerable delay.