After the fizz of activity in January, when many sole traders and businesses hurry to get their books in order and submit tax returns, there is a deep sigh of relief. Unfortunately for those who are less organised, March soon comes around, and all of sudden it’s the 5 April and Year End. Savvy businesses will know what their 2018/19 accounts say and should have planned expenditure accordingly, but what can those people – who haven’t had the time or proclivity for detailed planning – do in the next few days to prepare for the end of the fiscal year?
Understand the Position of your Business
Whether you have months of receipts rattling around in a box or your bookkeeper has everything in order, you need the information processed and assessed. You should be looking at your finances –balance sheet, cash flow, and profit and loss documents – to determine where your business is now. Without these basics you’ll be making decisions in the dark.
> Profit and Loss – this itemises your income and outgoings and shows if your business is profitable at any given time
> Cash Flow – at a glance you will be able to see where your money goes, that is the in and outflow from operating activities (such as revenues and expenses), investing activities (such as assets bought and sold) and financial activities (such as loan repayments)
> Balance Sheet – this should summarise your business assets, liabilities and equity
What About the Remaining Days Until 5 April?
Understanding where your business is today is not the end of the story for your fiscal year end. What purchases have you still to make, is there ongoing work you want to or can get a partial invoice for, what invoices might you want to delay going out until 6 April or after? If your accounts are ‘cash basis’ – where they are based on money actually received and payments made – then you should try to ascertain if any further income will be received. The key message here is be organised and influence the income and outgoings if beneficial.
Should I Quickly Spend Some Money to Reduce my Tax Bill?
While having more expenses to reduce what you will owe to HMRC in January 2020 might sound like a fail-safe plan, you first need to ask yourself if you NEED to make those purchases. If you don’t really need a new laptop, you are likely to be better keeping the £1000 in the bank than trying to save a few quid going to the tax man. However, if you had planned to buy one in the next couple of months, then it makes sense to bring it forward and reap the benefits in the current tax year.
Of course, larger, capital expenses provide a greater opportunity for tax savings through your capital allowance, but the same advice can be applied to any expenses. Some common items that are often purchased in advance at this time include:
> Stationary – stock up on paper and ink
> Business cards and other marketing collateral – are you running low?
> Cleaning equipment – from toilet paper to handwash
> Travel tickets – if you know you’re taking a trip, book it
> Conference registration – reserve your space now if you want to attend
> Accountancy software – with Making Tax Digital for VAT coming in, pay an annual fee for a service
Are There Other Ways to Reduce My Tax Bill Before Year End?
It is important to review your pension contributions and ensure they are paid in before the end of the tax year. Pension contributions are offset against limited companies’ corporation tax bills as an allowable business expenses. If you are self-employed and on the basic rate, any pension contributions are not included within your Self Assessment but personal pension contributions will get a 20 per cent relief at source – for a £1000 contribution, you will pay £800 – where the government provides the top up. Should you be on one of the higher rates of tax, you will be entitled to this and the amount of the contribution also pushes the ceiling of the lower tax rate up. For example, if your contribution was £3,000, the higher, 40 per cent rate of tax begins from £49,351 of earnings instead of £46,351.
You can also give your staff a gift or arrange an event for them; a ‘trivial benefit’, social function or party for an employee is tax and National Insurance exempt and HMRC doesn’t need to be notified. However, there are rules to follow. You don’t have to pay tax on an employee benefit if it cost £50 or less, it isn’t cash or a voucher that can be exchanged for cash, it isn’t a reward for work and it isn’t in the person’s contract. The cost of a social function or functions must be £150 per employee or less – if it’s even £1 over the whole amount will be taxable, as this isn’t an allowance, but rather a limit. The other rules to be followed are the event/s must be annual and open to all staff.