Tax planning in a recession
Many businesses turn on wages and capital expenditure when times get tough but few look to tax. PwC explains why more companies should
17 April 2009 | 0
Cash-flow management is one of the most challenging issues facing businesses at the moment, and taxation is often given only secondary consideration.
Some businesses might, in a sense, be more pro-active by delaying tax payments and effectively using the taxman as the banker of last resort, although we do not recommend this type of planning.
Below are a number of simple, legitimate tips to reduce tax costs, both in cash-flow and absolute terms.
Furthermore, the current economic situation may make now the ideal time to consider long-term tax planning opportunities.
Mitigating “taxable profits”
Owners of profitable businesses should be aware of the various ways to mitigate “taxable profits”. The accounts of the business is the first place to start. The key point here is to ensure that all provisions are clearly specific in nature, since certain general provisions (like bad debts), are disallowed for tax purposes. In practice, the closing stock figure will have a big impact on the bottom line and should be valued at “the lower of cost or net realisable value”. It is therefore important to ensure that a comprehensive stock appraisal is completed and adequately documented at year end.
It is also important to be aware that certain payments (pension contributions, certain interest) are only allowed on a “paid” basis and therefore a business should ensure that the tax deduction does not, through slightly delayed payment, slip into the following tax year. All businesses should also review their capital allowances (tax depreciation) position, perhaps looking at putting new assets into use before year end, purchasing energy efficient equipment (expenditure 100% allowable in first year rather than over the normal eight year period), or claiming a balancing allowance by retiring obsolete equipment.
Mind the gap
All owners of non-incorporated businesses should take note of the widening gap between the 12.5% corporation tax rate and individual tax rates. Perhaps now is the time to consider incorporating. Those looking to start a new business might be interested to learn about the new corporation tax “holiday” for start-ups introduced (subject to a Ministerial Order) in the most recent Finance Act. It applies for three years from commencement and effectively means that a start-up only needs to pay corporation tax if the annual tax bill exceeds €40,000. The relief will not, however, be available in relation to a trade previously carried on by another person e.g. a trade previously carried on by a sole trader.
The computational issues outlined above are also relevant to loss making businesses i.e. maximise deductibles in order to maximise the tax allowable loss. The key question here is how can trading losses be used to a taxpayer’s best advantage? The answer is that it depends. Corporate taxpayers can often claim a corporation tax rebate through the option of carrying trading losses back to shelter profits of the previous year.
Individual taxpayers do not have this ‘carry back to prior year’ option, but might still be able to achieve a near term tax rebate, given that trading losses can reduce the individual’s total income for the relevant tax year. This may enable a taxpayer to reclaim tax if, for example, his/her spouse is employed and has paid PAYE. Any unrelieved losses can be carried forward, but are effectively ring-fenced since they can only shelter future profits from the same trade of the company or individual, as the case may be.
Finally, most businesses have become accustomed to paying their preliminary tax based on 100% of their prior year liability. However, owners of small companies (paying corporation tax of less than €200,000) and unincorporated business should, if profits are reducing, consider the 90% of current year liability payment option.
A viable way forward
Most of all, for viable businesses, the importance of remaining tax compliant cannot be overstated, since the sanctions (interest, penalties, publication, prosecution) that Revenue has at its disposal are extensive and potentially very expensive. The recommended approach for businesses that have fallen behind with their tax payments is to contact their accountant and plan (preferably involving Revenue) a realistic and achievable way forward.
A mentioned above, the current climate offers some opportunities. Perhaps you have been thinking about transferring the business to your children or giving away a stake in your business in order to incentivise key personnel, and taxation costs have been a barrier to implementing these wishes. The main point to appreciate here is that the tax liability is a function of rates and valuations. Now is the time to act if you believe that rates and valuations are likely to increase.
Resolve to set aside some time to consider how relatively straightforward tax measures can help your business through these difficult economic times; the results might surprise you.
Declan Doyle is a tax director in PricewaterhouseCoopers’ Business and Wealth Services group. Phone 01 792 8702