1. Pension contributions
Although now significantly restricted as to allowable amount per individual, employer pension contributions can still have a significant impact on corporation tax liabilities, However, such contributions must be paid within the accounting period for which a tax deduction is sought, and thus pre-year end planning is particularly essential in this respect.
2. Research and development (“R & D”) expenditure
There are two extremely generous tax regimes for small company R & D expenditure, one intended for profitable companies and the other for loss-making or pre-trading companies, although the two are significantly interchangeable. The former regime allows a 225% tax deduction for R & D expenditure, and the latter offers an effective 31.5% cash tax credit for such expenditure (14% credit on expenditure enhanced by 225%).
The benefits of accelerating R & D expenditure can thus be highly significant, but it can also be important to ensure that expenditure falls into the ‘right’ year. Given that the former regime results in effective tax relief of between 45% and 56.25% for R & D expenditure, compared to 31.5% under the latter regjme, ensuring that R & D expenditure falls, so far as possible, into profitable accounting periods rather than loss-making ones is a worthwhile exercise.
It is possible to claim a corporation tax deduction for bonuses paid to directors and other staff within 9 months of the end of the accounting period. However, the bonuses must relate to the period in question, and must have been proposed during that period, even if not quantified at that point. Thus part of any pre-year end planning exercise will be the preparation of an appropriate directors’ meeting minute, proposing that a bonus be considered for the accounting period, to be quantified once the actual accounting results for the year are known. This does not commit the company to paying such a bonus, but does establish any such bonus as deductible in the relevant accounting period, even though paid in the subsequent period.
4. Charitable donations
Companies are eligible for corporate Gift Aid on their charitable donations (essentially corporation tax relief), but only to the extent that the donations are actually made in the tax year. Note that there is an exception to this rule for donations by wholly owned trading subsidiaries of charities (which will typically Gift Aid or covenant 100% of their profits to parent charity), which are allowed to quantify and make the donation within 9 months of the end of the relevant accounting period, for practical reasons.
5. Enterprise management incentive schemes (“EMIS”) and company share incentive plans (“SIP”)
Where a company issues shares to employees under either of the above tax-favoured schemes, it receives a tax deduction for the market value of the shares so issued (based on the option price in the case of an EMIS). Thus if such share issues are contemplated, or indeed if the company wishes to set up EMISs or a SIP and issue shares immediately on set up, it is worth considering accelerating this process to obtain tax relief in the accounting period, particularly as this is a rare example of a tax relief arising without any corresponding expenditure of cash taking place. Tax relief is also available for the set-up costs of such schemes.