Why timing matters – picking the right moment to review your annual accounts
19th November 2019
For many, the most popular time for an annual accounts review is shortly after your business’ year end. Traditionally, that approach made sense – a review with your accountant once all the bits of paperwork for the year had been processed would give you an accurate picture of business performance, and allow you to make minor adjustments. But in an age of digital records and cloud accounting, we no longer have to wait to see a clear picture of how your business is doing – for a rapidly growing number of businesses, that information is readily available in real time.
While access to information has improved, changes in legislation have reduced room for manoeuvre once your year-end has passed, which means waiting to assess your accounts risks missing out on opportunities to improve your financial position.
In our view, for most businesses the best time to review your accounts in detail is around nine months into your financial year – at or around the end of your third quarter. Why? Because you’ll have a pretty good view of your income and expenses across the year, your likely tax position and any anticipated changes before the year is out. Most importantly, with three months still to go, there’s time to make decisions to maximise tax efficiency.
If you’re having a great year, the chances are you’ll be on track for a chunky Corporation Tax bill. We all have to pay tax, but with enough warning, we can look at options to reduce your tax liability depending on your personal circumstances and business needs.
Here are just a few examples:
• Paying into a pension scheme remains one of the most tax efficient ways to extract money from your business. You can opt to make pension payments, usually up to a maximum of £40,000 per year (although, you can carry forward any unused annual allowance for up to three years), which will significantly reduce your Corporation Tax. It is worth noting that for some high earners the pension annual allowance can be reduced, so this should be taken into account when planning a remuneration strategy.
• Dividend planning – with enough time, we can look at the best way to spread your dividend payments, bearing in mind both company cash flow and tax liability.
• Have you taken advantage of the ‘Trivial Benefits Exemption’ which allows you to award staff (including directors) small gifts up to a certain value without attracting income tax or national insurance? Directors themselves can claim an additional £150 under this scheme per year, provided individual gifts do not exceed £50.
Tax reliefs and allowances
With a clear picture of the first three quarters, we can look at whether you’re maximising all the reliefs and allowances which could apply to your organisation.
Considering a company car?
In many cases, company cars are no longer tax efficient. But if you’re planning on investing in an electric vehicle, there are some incentives that could see most of your Corporation Tax bill diverted to a deposit on a car. There are lots of caveats, so this isn’t a decision to make in a hurry, but with three months to consider your options, it’s worth a look.
Capital allowances often change from year to year, so planning when and how you make a capital purchase can change how it impacts your bottom line.
If you’re developing something new, or improving an existing product, process, design or system, your business may be eligible for research and development (R&D) tax credits which can result in significant tax savings. Are you taking full advantage of specific industry tax reliefs such as Video Games Relief or Film Tax Relief?
Although these reliefs can be applied retrospectively after your year end, knowing what you’re eligible for early on will help with your decision-making.
Charitable work and donations:
Have you made any corporate donations which would be tax deductible? Understanding what you have already done means we can advise you on any other options to maximise tax efficiency.
Preparing for a timely review
The majority of our clients are now using cloud accounting, which means we can access the same, up to date data. Most receive quarterly or monthly management accounts which provides an interim health check on your business and can feed into the annual review process. If your records are reasonably up to date, there’s no reason why your annual review needs to wait until your year end – simply contact your HB&O account manager to request an earlier review.
If you’re not already benefitting from cloud accounting and would like to know more, please contact our team on firstname.lastname@example.org
THIS ARTICLE FIRST APPEARED IN OUR AUTUMN 2019 EDITION OF THE BOTTOM LINE.