Year-end tax planning for business owners

8 Feb 2022

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We outline what business owners can do before the end of the UK tax year to make the most of the available allowances and reliefs open to them.

Family businesses

Where there is a family company, dividends may represent a tax-efficient means of extracting profits by adult family members. Dividends are taxed at lower rates than employment income and do not attract NICs. However, dividends are not tax deductible for corporation tax purposes. It should also be noted, as mentioned in this article, from 6 April 2022 the rates of income tax applicable to dividend income will increase by 1.25%. The dividend ordinary rate will be 8.75%, the dividend upper rate will be 33.75% and the dividend additional rate and the dividend trust rate will be 39.35%. The dividend trust rate will also increase to 39.35%. These changes will apply UK-wide.

If you are a shareholder director, excess profits may be paid out as a dividend or a bonus. Bonuses are taxed at your marginal rate of tax, and will attract both employee and employer NICs, which will also increase from 6 April 2022 as part of the new Health and Social Care Levy, mentioned here. However, these will be deductible for corporation tax purposes.

Sole traders

Losses made by an unincorporated business in the accounting period ending in the 2021-22 tax year can be offset against your other income of that year and/or the previous three years (a temporary extension of two years to the usual 12-month period) subject to a maximum of £50,000 or 25% of your total income for the year, whichever is greater. The amount of trading losses that can be carried back to the preceding year remains unlimited but the total amount that can be carried back by a taxpayer to the extended period will be capped at £2 million.

Unused losses can be carried forward against future profits of the same trade with no limit.

Further options may be available to obtain relief for losses in the early years of a business, or on its cessation.

Top tips

  • Employing a spouse or child might allow them to utilise their personal allowances and provide an NIC record for state pension purposes. The level of salary paid must be commensurate with the duties performed and must meet National Minimum Wage requirements. Pension contributions can also be made on behalf of a spouse or child who you employ, to save tax and NICs, although care should be taken to ensure that the pensions auto-enrolment rules are complied with. Any contributions made should be commercially reasonable.
  • If your business is making losses, consider the implications of the restrictions on setting off such losses against other income.
  • Consider carrying back losses where possible, to take advantage of the temporary extension of the loss carry
    back period.

Looking forward

To support changes needed as part of the Making Tax Digital project, the government is planning to reform the basis period rules, intended to align trading income with other income for reporting purposes. At present, businesses with the same annual profits but different accounting dates may be assessed to different amounts of income tax in a given tax year, due to having a different basis period (typically the accounting year ending in the tax year). The changes will lead to businesses instead being assessed on their profits arising during the tax year.

To ease the transition to the new regime, in 2023-24 businesses will be assessed to tax on the profits from the 12 months from the end of their last basis period ending in 2022-23, plus a ‘transition’ component running from the end of that period to 5 April 2024. Any overlap profits brought forward will be fully relieved in 2023-24, leaving a clean slate for the new tax year regime. No overlap profits will be generated in the future.

As the additional 2023-24 tax on transition profits could be costly to some businesses, these profits will automatically be spread over a period of five years to give a measure of relief. The taxpayer can elect to accelerate the tax payment on any amount of these profits if they wish, which may be beneficial in the context of the taxpayer’s wider affairs.

From 2024-25 the current basis period rules will be scrapped completely, and businesses will instead be assessed on their profits arising within the tax year, regardless of when their accounting date falls. For businesses whose accounting dates do not fall between 31 March and 5 April (which are treated as one and the same for the purposes of these rules), there will be a time apportionment of profits between the relevant tax years.

These changes will affect businesses within the scope of income tax self-assessment, such as self-employed individuals, partners in trading partnerships, and certain other entities with trading income such as trading trusts and estates, who do not draw up their accounts to 31 March or 5 April each year. Businesses may choose to change their accounting date ahead of the changes, to make calculating taxable profit each year easier.

Capital expenditure

Capital allowances can be claimed on expenditure on certain types of assets used in your business.

The Annual Investment Allowance (AIA) is a particularly valuable relief for businesses. 100% relief is given for expenditure on most types of plant and machinery and many fixtures in buildings, up to a limit of £1 million (until 31 March 2023).

Any other expenditure eligible for capital allowances generally attracts an annual capital allowance of 18% or 6% (depending on the nature of the expenditure) on a reducing balance basis. A new ‘super-deduction’ allows companies within the charge to corporation tax to claim 130% relief on the acquisition of new plant and machinery. It applies to acquisitions made in the two-year period that began on 1 April 2021.

A 50% first year allowance has been introduced for qualifying ‘special rate’ assets acquired in the two-year period from 1 April 2021.

Structures & Buildings Allowance can provide relief for expenditure on new non-residential buildings (including new conversions and renovations). Relief is given at a flat rate over 33 and a third years at 3% per annum.

In addition, there are reliefs available for expenditure on qualifying research and development.

Businesses in designated Freeport tax sites are eligible for Enhanced Capital Allowances and Enhanced Structures & Building Allowance of 100% and 10% respectively.

Top tips

  • To accelerate tax relief, consider purchasing new assets before the new ‘super deduction’ and first year allowances expire in March 2023.
  • Consider the timing of the disposal of cars and other equipment. Whether a disposal is made before or after the end of your accounting period may affect the taxable profit for the year.
  • If you are intending to purchase commercial property (including Furnished Holiday Lettings (FHLS)) containing fixtures, seek advice to ensure that the maximum capital allowances are claimed. On purchase, any value attributed to the fixtures must be agreed by a joint election between the seller and the purchaser.

Business Asset Disposal Relief

Business Asset Disposal Relief (BADR) was previously known as Entrepreneurs’ Relief. It reduces the rate of CGT to 10% on qualifying business gains, up to a lifetime limit of £1 million per person.

The relief applies to a disposal of shares in a trading company provided that, during the period of two years immediately prior to the disposal, you:

  • Own at least 5% of the ordinary share capital;
  • Are able to exercise at least 5% of the voting rights;
  • Are beneficially entitled to at least 5% of the profits available for distribution or 5% of the distributable assets on winding up, or, on a sale of the company, would receive at least 5% of the consideration as a result of holding the shares; and
  • Are an officer or employee of the company.

The relief can also apply to the disposal of a business or part of a business, and certain assets used in a business, although restrictions may apply if:

  • There is personal use of a business asset;
  • The asset was used in the business for only part of its ownership period;
  • You were not involved in the business throughout the ownership period; or
  • The asset has been rented to the business.

A separate relief, Investors’ Relief, is similar to BADR, but allows external investors to claim tax relief on their investment in qualifying shares of unlisted trading companies. For more on this, please see this article.

Top tips

  • Planning needs to be carried out well in advance of any sale, to ensure that all conditions – including the two-year ownership requirement – are satisfied prior to disposal.
  • Pre-sale restructuring may help to maximise the relief available to a couple who work for and own shares in a family business. For example, transferring shares between spouses or civil partners may create opportunities to increase the relief where one spouse/civil partner owns at least 5% of the shares but the other owns less than 5%.
  • If you have already used all available relief, it may be possible to give shares to children, perhaps using a trust structure if you wish to retain some control and avoid outright sums being given. This is an area where specialist advice should be sought.
  • Where assets are held jointly by a couple but used in a trade carried out by one spouse only, restructuring may need to be carried out to ensure that the whole asset can qualify for BADR.

Business Property Relief

Business Property Relief (BPR) can reduce or completely remove the value of a business from the charge to IHT. It applies to both lifetime gifts and on death. If the donor dies within seven years of such a gift, BPR will only be given on death if the original property is still owned by the donee at the date of the donor’s death and still qualifies as relevant business property. Specialist advice should be sought.

Relief is currently available at 100% for a business or shares in an unquoted trading company.

Relief at 50% applies to a controlling holding of quoted shares; and to land, buildings, plant and machinery used in a business carried on by the transferor, a partnership of which they are a member, or a company they control.

The property must have been owned for at least two years prior to the transfer to qualify for relief.

Top tips

  • Take specialist advice if your business involves the provision of land (for instance, furnished holiday lets or livery businesses). The level of services provided is usually key to the availability of relief, but as recent case law has shown this is a complex area.
  • Ensure that BPR is not inadvertently lost by leaving assets eligible for the relief to an exempt person, such as a spouse or civil partner.

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This article is published on a general basis for information only and no liability is accepted for errors of fact or opinion it may contain. Professional advice should always be obtained before applying the information to particular circumstances. Tax law is subject to change. This publication represents our understanding of the law and HM Revenue & Customs’ practice as at 1 January 2022. The FCA does not regulate tax advice.