- Acceleration of revenue expenditure
Where it is known that significant expenditure needs to be incurred at some point in the near future, it can make sense to accelerate it into the current accounting period to advance corporation tax relief by 12 months. This does not necessarily involve paying for the item concerned; because of the accruals basis being under an obligation to pay will usually be sufficient to make the expenditure allowable.
- Deferral of income
Similarly, if it is possible without financial damage to the business to defer income into the following accounting period, tax on that income will be due 12 months’ later. Care needs to be taken in this respect because of the accruals basis mentioned above, particularly if the income arises on disposal of an asset that qualifies as work in progress, and will thus be recognised in the accounts in any event. And it is invoicing that matters in this respect, not the receipt of cash, except where cash is received in advance.
- Deferral of chargeable gains.
Where a company is going to realise a taxable gain on disposal of an asset, it may be possible to defer that disposal into the next accounting period, either by simply transacting at a later date or perhaps by introducing a condition into the sale contract that will not be fulfilled until after the accounting date. In this respect it is the date of exchange of contracts that matters (i.e. when the contract becomes unconditional) as opposed to when the contract is completed.
- Expenditure eligible for Annual Investment Allowance (“AIA”)
Each company is eligible for 100% AIA on £25,000 of expenditure on plant and machinery in a 12-month accounting period. Excess AIA cannot be used in other accounting periods, and thus an element of ‘smoothing’ of capital expenditure can make sense where there is a risk of a company either wasting its AIA or exceeding it in a particular accounting period. Acceleration of capital expenditure on the same basis as revenue expenditure can thus make sense where AIA would otherwise remain unused. Care needs to be taken in this respect as there are specific tax rules on when expenditure is incurred for capital allowances purposes.
5. Expenditure eligible for Enhanced Capital Allowances (“ECA”)
The Carbon Trust maintains lists of ‘green’ energy and water technologies, in which investment qualifies for 100% ECA, in addition to the AIA. Thus acceleration of such expenditure can have highly beneficial tax effects.