1. Stock provisions
Stock is valued for accounting and tax purposes at the lower of tax and net realisable value (i.e. sale price less costs of sale). Thus it is important to identify those items of stock that will realise less than their cost, and write them down in the accounts to net realisable value. It is for the business to decide to what extent it isolates particular items of stock in this respect, and thus there may be significant scope for profit reduction, as a fall in the value of stock increases cost of sales in the profit and loss account.
It is vital that any provisions are specific to particular lines of stock, as general stock provisions are not deductible for tax purposes.
- Work in progress valuation and provisions
There are specific rules relating to the valuation of long-term work-in-progress, and the recognition of profit as it arises over the life of a contract, and construction businesses in particular will need to have regard to the impact of these rules in considering work-in-progress valuation.
Many professional practices also have large amounts of work-in-progress, and again there may be significant scope for reducing its value for accounting and tax purposes. For instance, where contingent fee work is undertaken, it is permissible to look at each case on an individual basis and use the uncertainty over the outcome to justify treating the value of work in progress as nil. It is also important to look at the carrying value of work in progress and consider all cases in which that value will or may not be matched, and write down its value accordingly. There are also detailed tax rules on valuation of professional work in progress that need to be applied.
Where significant contingent fee work is undertaken, it may well be in the company’s interests to prepare its accounts very quickly after the year-end in order to minimise the number of contingent cases that settle in the business’ favour before the accounts are finalised, and thus need to be brought into account as work in progress.
Again it is vital that ay provisions are specific to particular cases, as general work in progress provisions are not deductible for tax purposes.
- Bad debt provisions
Where the receipt in full of a debt from a customer or borrower is doubtful, it is possible to make a reasonable, tax-deductible provision for that debt. Again it is vital to ensure that the reasons for such provisions are evidenced, and that the provisions relate to specific debts and are not general, as general bad debt provisions are not allowable for tax purposes.
4. Goodwill impairment
Where goodwill has been acquired after 31 March 2002, reasonable commercial amortisation of its value is allowable as a corporation tax deduction. However, it is also necessary for accounting purposes to consider for each accounting period of the company whether the value of goodwill is ‘impaired’, and thus needs to be written down. Given that such reductions are also allowable tax deductions, this issue needs to be considered as part of a year-end tax planning review.
5. Loss relief claims
Claims to carry back trading losses to the previous accounting period must be made within two years of the end of the loss-making period, and thus the pre-year end planning exercise is a good point at which to consider whether any potential claims may be about to become time barred.