Spring is a good time to look at your tax and financial affairs.
The new tax year that started on 6 April was an opportunity to set some financial goals for your firm and your own fi nances.
Many firms that are financially sound nevertheless struggle with cash-flow problems. Taking a little time to plan ahead for major expenditure and consider the knock-on effect on partners' tax liabilities can have a significant impact.
Consider an architectural practice with a 30 April year end which is planning some major repairs to the office roof.
The repairs are estimated to cost £20,000. If the repairs are carried out in May 2006, the partners will be in a position to reduce their tax bill on 31 January 2009 by £8,000. However, by bringing the work forward by just a few weeks to the end of April, the tax relief is advanced by a whole year to January 2008 (and there may even be the possibility of bringing the relief forward to the interim tax payments due in January and July 2007).
Too often, major expenditure is pushed into the beginning of a new accounting year so that it 'comes out of next year's budget'. However, as the example above shows, sometimes it makes sense to bring the cost forward.
The revenue recognition rules have changed as a result of accounting guidance FRS5 and UITF 40. In basic terms, this change of emphasis means that for many firms the payment of tax will be advanced on recurring work. In view of this, it is more important than ever that firms tighten their financial controls.
The start of the new year can act as a catalyst for change.
Simple measures that should be reviewed include:
strengthening debt-collection procedures (the tax still needs to be paid even if you have not received payments from your customers). Ensure that debts are chased regularly and, if possible, pass responsibility to a credit controller rather than asking partners to chase outstanding bills;
ensure that work in progress (WIP) is billed at the earliest opportunity. Ensure that projects are billed on a regular basis, at least quarterly if not monthly; and - review procedures for providing for bad debts and WIP.
As frustrating as it is not to receive payment of fees, many firms delay providing against bad debts in the ever-optimistic hope that the fee will be paid. If there really is little chance of recovering the debt, a provision should be made. If you don't do this, you will be in the worst position of all - not having been paid for your services and yet still paying tax on the debt.
Providing in advance for certain expenditure can also reduce your tax bill now. There are conditions which need to be met but if, for example, the office lease requires the firm to pay for dilapidations, making a properly quantified provision for the sum that will be payable at the end of the lease should reduce your tax bill now. However, you should remember that this is only a timing adjustment to bring the relief forward.
The disposal of assets, either by the firm or by individuals, needs particular care around the beginning of the tax year.
Disposing of an asset after 6 April 2006 will push back the payment of tax on any gain from 31 January 2007 until 31 January 2008. However, in some circumstances this may not be benficial. If the asset is standing at a loss and you have other gains (either personal or realised through the firm) in the tax year, then crystallising the loss before the end of the tax year will enable you to reduce the tax on those gains. Care should also be taken to maximise taper relief. Taper relief reduces the gain so that a higher rate taxpayer pays a rate of just 10 per cent on business assets held for a minimum period of two years.
However, if assets are sold just one day before the two-year anniversary, a tax rate of 20 per cent applies.
The graph shows how the rate of business asset taper relief (BATR) varies according to the length of time an asset is held for both business and non-business assets.
The start of the tax year is also a time to look into your own financial position. This year in particular a new pension regime begins on 6 April 2006 (known as 'A day'). This will be of particular relevance to the self-employed or those in partnership and for many will open up a more exible system than at present.
Those individuals with pre-1988-style retirement annuity policies should review their policies to ensure that they are invested in the most appropriate funds. They will no longer be tied into retaining the old-style policies to maximise tax relief.
Many higher-rate taxpayers forget to claim the higherrate tax relief on gift aid payments made to charity. For example, if you make a payment of £100 to charity under gift aid, the charity will receive £128 and you can then claim back a further £23 on your tax return. Make a note of any payments you make under gift aid from 6 April and ensure that next year you claim back this tax. If you make the payments before submitting your return for the year to 5 April 2006, you can carry them back and claim them against the earlier year. Don't forget all those sponsorship forms where you tick the gift aid box - it all adds up.
The new tax year also brings with it a fresh set of tax-free allowances. If your circumstances allow it, take advantage of these.
individual savings account - up to £7,000 a year;
tax-free income - £4,465 a year;
capital gains tax annual exemption - £8,500 a year; and inheritance tax annual exemption - £3,000 a year.
Finally, while it is not possible for income to be taxed on any person other than the owner of the asset from which it arises, it is the case that spouses, and now those in civil partnerships, can transfer assets between them tax free. Therefore, if your partner does not fully utilise their exemptions or lower-rate bands, you should consider transferring assets to them to save higher-rate tax.
With a little forethought, it is possible to make the most of the new tax year and maximise the tax allowances available.
Karen Liddell is a member of BDO Stoy Hayward's specialist professional practices team