- Choice of accounting date
The accounting date of a company is not immovable. When a company is formed it is given a default accounting date, usually the last day of the month in which the first anniversary of its formation falls. There are two main tax reasons why a company might want to change its year-end.
Firstly, it may have a seasonal business, with the result that the majority of its profits arise over a relatively short period of the year. A one-off cash flow advantage will be obtained by setting the year-end just prior to the company’s busy period, which gives the maximum time lag for the company between earning its profits and paying tax on them.
Secondly, there may be advantages in terms of marginal corporation tax rate to adjusting the year-end. If a company is in a position for its normal 12-month accounting period where it would be paying corporation tax at marginal rate (see 2 below), but its profits for the next period of up to 6 months are expected to decline to a considerable extent, it may be possible by extending the accounting period to reduce the proportionate profit for the 12 month period and thus restrict or eliminate the marginal rate liability.
The ability to change the accounting date of a company is not unrestricted. In particular, it may not extend its accounting period beyond 12 months more than once in a 5-year period.
Where a company has an accounting system that operates on a weekly basis, it is entitled to slightly change its year-end date to fit in with this weekly cycle, by a few days either way.
2. Group structure – corporation tax small companies’ rate
The structure of corporation tax rate bands is currently as follows:
First £300,000 of profits Small companies rate (currently 20%)
Next £1,200,000 of profits Marginal rate (currently 25%)
Further profits above £1,500,000 Full rate (currently 24%)
However, the bands are divisible equally between all active companies under common control, and thus groups of companies or stand-alone companies owned by the same person or group of people will suffer a significant restriction to the level of profits eligible for the small companies rate band. The bands are also time-apportioned for short accounting periods of less than 12 months.
Because common control at any point in an accounting period will result in the companies being treated as associated for the whole period, it is vital to consider this issue as part of a pre-year end tax planning exercise. It may be possible to re-structure a group, change control of a company or companies, or sever financial interdependence between companies owned by relatives in order to restrict or remove the impact of the associated company rules.
Common control is also important for Annual Investment Allowance purposes (see 11 below), as AIA is apportioned on a similar basis to the corporation tax rate bands.
3. Group structure – substantial shareholdings exemption (“SSE”)
It is also important to consider the structure of a company’s investments in other trading companies from the viewpoint of SSE. Where a company owns 10% or more of another trading company, it is eligible for corporation tax exemption on any chargeable gains arising on disposal of its shares in that company. Thus it is important where possible to ensure that this 10% test is met for company investments.
4. Rollover relief
Where certain classes of asset are disposed of (e.g. pre-1 April 2002 goodwill, land and buildings occupied for trade purposes, fixed plant and machinery and various agricultural quotas) it is possible to roll over gains on disposal to the extent that the sale proceeds are re-invested in other assets of the relevant classes within a period one year before to three years after the disposal. It is always sensible to keep track of deadline dates for rollover relief re-investment so that opportunities for tax deferral are not missed.
5. Directors’ loan accounts
Where such accounts are in credit, consideration should be given to paying interest on the credit balances. Provided this is done within 12 months of the end of the accounting period the company can claim tax relief, so part of the year end tax planning will also be to ensure that any interest for the previous year has been paid (or credited to the loan accounts).
Where accounts are in debit, a liability will arise for the company to deposit 25% of the overdrawn balance with HM Revenue & Customs where the balance has not been cleared within 9 months of the year end. Thus the plans for clearing any overdrawn balances should be considered, and also the potential for any set-off of credit against debit balances. Whilst HMRC does not permit this as such, it is possible for directors to reach informal arrangements with each other to loan funds to clear overdrawn balances.
The payment of commercial interest on a director’s loan does not affect the requirement to make the above deposit, but does have an impact on the director’s benefit in kind position. On this subject, whilst not strictly a year-end matter, it is also important to consider the requirements to report overdrawn loan accounts on Forms P11D, and in particular to ensure that the information is available on a timely basis to enable that to be done. The company accounting system needs to be capable of generating an up to date balance on each director’s loan account at any given point in time.