Company profit shifting

End of Zero Hour Contracts

Last year showed a decent profit for which a sizeable tax bill will be due. However, the current year is expected to present a loss and this might leave you short of cash. What steps can you take to help fund the tax payable for last year?

Profits to losses

The last few years have been tough on businesses and we might not be out of the woods yet. If your company is facing a downturn, the last thing you need is a hefty corporation tax (CT) bill just when you expect finances to be tight. The trouble is that’s exactly what can happen.
Example. Bloggs Ltd profit for the year to 31 December 2013 was £120,000. CT is due on this nine months and one day after the end of the accounting period and so Bloggs pay £24,000 on 1 October 2014. If, between 1 January 2014 and when the CT is due, it makes a loss it can obtain some of the tax back, but it must first pay it and then wait for a refund, which could take a while.

Loss relief rules

The rules allow companies to reduce the CT payable on current profits where they made losses in earlier years. But losses made in the current year can’t be set against the previous year’s CT bill until the accounts in the current (loss-making) period have been prepared. In our example that would mean Bloggs waiting until at least January 2015 to reclaim some of the CT it paid for 2013. This won’t be of much use to Bloggs when it’s struggling to find the £24,000 CT in October.

Funding your tax payment

Bloggs could ask the bank for money, but it will probably charge a hefty arrangement fee, plus interest, which will only make cash flow worse. If Bloggs expects finances to improve within a reasonable time, it could ask HMRC for a time-to-pay arrangement. There’s no fee involved and its interest rate is relatively low: currently 3% per annum. Alternatively, Bloggs could do something else.
Tip. By changing its accounting period it can accelerate tax relief for its current losses. Tax and company law will allow a company to extend its accounting period to cover up to 18 months. This would help Bloggs cash flow.
Example. Bloggs Ltd has a financial year end of 31 March. Its taxable profit for 2013/14 is £100,000. The CT payable on this is £20,000, due on 1 January 2015. The company is expecting to make losses of £30,000 for the six months to 30 September 2014. Extending its accounting period to the maximum 18 months would reduce its profit to £70,000. But that’s not the end of the story.

One year’s profit

A CT period must not exceed twelve months so following the change of accounting date Smith still needs to complete a CT return for the year to 31 March 2014, and then one for the six months to 30 September. The £70,000 profit is spread across these, i.e. £46,667 to March and £23,333 to September. The corresponding tax payments are: £9,333 (£46,667 x 20%) on 1 January 2015; and £4,666 (£23,333 x 20%) on 1 April 2015.
As a result of the change of accounting date Bloggs CT bill for January 2015 is less than half what it was. While it might still need help from the bank or time to pay from HMRC, this should now be easier to obtain and cost less in interest.