Accelerating Or Deferring Company Income: How And When You Can Do It

Alan Pink considers the importance of timing for tax purposes.

In the days of high interest rates, the name of the game was almost always to push back tax liabilities in time as much as possible.

For example, paying tax in 21 months’ time rather than in 9 months’ time made a lot of difference to the interest earned or paid by a company. Now the motives for pushing back tax liabilities are nothing like as strong – if you exclude the motivation of the ‘live now, pay later’ brigade.

Things have also changed, rather, in relation to the technical aspects of corporate loss offset. Under new corporation tax loss relief rules, generally speaking it’s less important to secure that an item of income or expenditure falls within one accounting period rather than another. 

So, subject to one point concerning provisions which I’ll make below, accelerating or deferring income in order to save tax is more likely to be found in the context of payments out of the company and to the individual directors/shareholders. An obvious example of this is the time when the top rate of income tax was increased from 40% to 50%; and, in the other direction, when it was reduced from 50% to the current 45%. There was an understandable rush to pay out dividends before 5 April when the rate applying to the same dividend paid after 5 April would be higher and, of course, the converse applied where the top tax rate reduced. 

However, as well as changes to the tax system imposed by the government, there can also be changes in personal circumstances which have an impact. Some people’s income fluctuates wildly, with very high earning years and very low years. If you are in any way in control of the timing of your personal income (e.g. if you are a director/shareholder of a close company), it can result in a permanent tax saving, depending on the numbers, if you make sure that the income is received in the year in which your other income (and perhaps capital gains) position is lower. And, of course, this can be in either direction, with an advantage being obtainable in some circumstances by deferring income to next year, and in other circumstances, by advancing the payment of income to the current year.

One obvious, but strictly non-legitimate, method of a company deferring its tax liabilities is where an amount could be invoiced by that company to a client or customer, but the invoicing is held back until after the company’s accounting year end. In a fairly rough and ready accounting system, this income could then be treated as being wholly that of the subsequent period, even though it has really been earned in the current period. As mentioned, I think this is generally a non-legitimate method of deferring tax by companies because accounting standards now often require work-in-progress to be brought into account in any event in the earlier period, particularly where the amount concerned is fully invoiceable because the service or goods have been provided by the period end.

Employee benefit trusts (EBTs) used to be seen as a wonderful method of corporation tax deferral – which could be so long term it was effectively an elimination of the tax. Very few advisers are now advocating EBT’s, however, because HMRC have directed the full force of their anti-avoidance artillery against this particular arrangement.

Strictly speaking, there is no room for manoeuvre, generally, on the question of the correct time to recognise income or expenses in a company’s accounts; because a company’s accounts are required by law to show a ‘true and fair view’, and one aspect of this is the correct timing of credits and debits to the profit and loss account. However, the reality of the matter is that the company owner, by being fully aware of and concentrating on aspects of the accounts which affect timing, can actually result in those accounts showing different results between periods.

If you are a company owner and wish to reduce the tax on this year’s profits, therefore, take a long hard look at each of the following:

Probably the most straightforward example of an item which is generally under the control of a director/shareholder of a company, however, is the payment of dividends. The rule here, for income tax, is quite simple. The dividend is taxable in the year in which it is received, and it doesn’t matter whether the profits out of which the dividend is paid have been earned by the company some time previously. So, it can make a lot of sense, in many circumstances, to have a look, shortly before 5 April, at the dividend payment position. 

One particularly acute example of the importance of considering this timing is the availability of the dividend ‘nil band’ of £2,000. Where a shareholder is not receiving dividends of this amount generally from companies, failure to make a dividend payment before 6 April can mean the permanent loss of this valuable relief.

Director’s remuneration is also an area where the timing of the payment is under the director/shareholder’s control. 

Like provisions for stock, debtors, and warranty claims, however, there is also the possibility of making provisions for director’s remuneration which can give a tax benefit. This is one-off in a sense, because the deferral of tax represented by the provision is, one could say ‘merely’, deferring the problem by one year. However, if provisions are made year after year on a similar basis, you have effectively achieved a one-off deferral and, therefore, a reduction of tax. 

Let’s take an example. 

CT Reduction Limited makes up its accounts to 31 July, and regularly pays its directors ‘bonuses’ in the region of £120,000 per annum. Until now, the accounts (no doubt technically incorrectly) have simply shown these payments as a deduction in the year in which they are actually paid to the directors. However, director’s remuneration should be related to the year in which the obligation to make the payment arose. 

In the year ended 31 July 2018, then, it is actually already predictable that the directors have earned bonuses of £120,000, on the basis of the results for that year. So, the finance director is within his rights putting in a provision, in the 31 July 2018 balance sheet, for a £120,000 payment (together with the associated employer’s National Insurance contributions). Provided this provision is general rather than specifically allocated to particular directors and drawable by them, they are not treated as having been paid this amount until it is actually remitted to their bank accounts, which could be as late as 30 April 2019. Therefore, the relief for the amounts will be in the July 2018 accounts as far as corporation tax is concerned, whilst the payment of PAYE, etc., is not due until the 2019/20 tax year. Effectively, the company has secured relief for two years’ worth of directors’ remuneration in one set of accounts.