Pre-year end planning for our limited company clients

(Last Updated On: 14th March 2018)

If your companies year end is fast approaching, there are a few things you should be considering. Contrary to popular belief this is not all about keeping your tax bill down!

The first thing you need to consider when it comes to your year end is, do you want to show a higher or lower profit. Lower profits, means lower Corporation Tax. But the pursuit of lower Corporation Tax could have an unintended result.

The most significant unintended result is to do with finance.

As shareholders/directors, you may be looking to get a mortgage or remortgage your family home. Maybe the fixed interest rate is about to expire? Or you want to do some home improvements and release some equity in your house to finance it? Perhaps the Bank of Mum and Dad has been called in to release some equity to help one of your children put down a deposit on their first home?

It is almost a certainty these days that the mortgage company will want to see your companies accounts and want an Accountant’s Certificate from us, your accountant. They will want to see what the post tax profits of the company were and how much your dividends and salary were for the last 2-3 years.

Depending on the mortgage company they will either average your last 2 or 3 years results, or come up with some other wonderful formula to assess if your profits and drawings allow them to lend the money you need.

This is why we always advise clients to be thinking of their company performance and the amount of dividends etc for at least 2 years prior to when they will be getting a new mortgage. Planning is key.

So when your year end is approaching, you may want to boost your profits, it may mean more Corporation Tax, but it may also mean you get the mortgage you want.

We’d recommend you speak to a mortgage broker early to understand what your options are and how much profit and dividends etc you need to show to get the mortgage you want.

 

There’s another finance angle to consider too.

External investment? Either loan funding or share investment. What do you need your company to look like to secure that funding?

Grant funding? Now this can be tricky. You need to show you have a financially secure company, so you have some reserves, but too many reserves and it can prove difficult convincing funders of the need for the grant.

So once you’ve determined what your aims are, what options do you have to get your company into shape for year end:

 

Area to Look At Desired Impact What To Do
Fixed Assets Boost After Tax Profits Buying fixed assets near your year end, won’t decrease the profits of the business as the depreciation would be low. But due to capital allowances your taxable profit will be lowered and you’ll pay less Corporation Tax. Which means your after tax profit will be higher.

If you’re considering a large fixed asset investment, do check in with us first though.

Work In Progress – work done in the year but not invoiced until after year end. Boost Profits Even if you can’t invoice your client until after your year end, if you’ve worked on that contract before year end, then that income still counts.

You could consider working overtime or focusing your team on client work rather than internal work in the run up to year end.

Work In Progress – work done in the year but not invoiced until after year end. Decrease Profits Conversely to the above, you could delay kicking off projects till after your year end, so that income fits into next year. Obviously whilst not annoying your client!
Deferred Income – work invoiced in the year but work performed after the year end. Boost Profits If you have clients paying in advance, make sure you complete as much of that work as possible before your year end.
Deferred Income – work invoiced in the year but work performed after the year end. Decrease Profits Conversely to the above, delay work on the project to after your year end, so the income gets shifted to the next year.

 

Common items, that won’t actually make a difference to your profits:

  • Spending on something which you won’t get the benefit from till after the year end,
    • E.g. a training course – the expense ends up in the year when you attend the course.
    • E.g. paying a deposit – the expense ends up in the year you get the goods or attend the event.
    • E.g. buying an annual software subscription or insurance – the expense is prorated to the term of the subscription or policy.

 

Lastly, that brings me to Dividends. Dividends don’t impact Corporation Tax, so declaring more won’t get your Corporation Tax bill down.

For all our limited company clients we’ll be contacting you before your year end to determine the best level of dividends to take based on your bookkeeping to date. It’s a delicate balance between what you need to take out of the company, or show as income for mortgage purposes for example, and the amount of Income Tax to then be paid.

As you can see it’s all about planning….

 

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