Tax planning for turbulent times
Clodagh Hegarty and Claire Scott, qualified accountants and registered tax consultants with Carlin McLaughlin & Co. offer some suggestions on how businesses in the current economic climate could improve their cash flow by reviewing their tax position.
Review preliminary tax payments
In recent years many "small" companies opted to base their preliminary corporation tax payments on 100% of the prior year liability. As taxable profits were often rising this was the most convenient and cash efficient way to calculate preliminary tax. As profits are now falling significantly for many of these companies, and with it a greater strain on cash flow, it will make sense to estimate current year tax liabilities and to base preliminary tax payments on those lesser amounts.
Sole trades and partnerships should also review their preliminary income tax payments for 2008. For many years they may have simply paid 100% of their prior year income tax liability, again because their taxable profits were increasing year on year. However, where profits have fallen in 2008 and therefore too much preliminary tax has been paid, consideration should be given to prioritising the submission of the 2008 income tax return to obtain any refund due.
The date the 2008 income tax return is filed has no relevance to when the 2009 preliminary tax is due (16 November 2009 is the latest date for payment). Also consideration should be given to estimating actual 2009 income tax liabilities for 2009 preliminary tax purposes, as opposed to simply paying 100% of your 2008 liability.
Care does need to be taken when estimating liabilities as Revenue can charge interest at approximately 10% per annum if preliminary tax is underpaid.
Making the most of losses
Any business incurring losses should ensure that they claim the maximum tax value for those losses.
For companies, trading losses can be set against income and gains in the current period and income and gains of the prior period of a corresponding length. Companies that are part of a group should ensure that any remaining trading losses are claimed by other group companies which have taxable income or gains during the period. Any remaining trading losses have to be carried forward for use against future profits arising in that trade.
Sole trades and partnerships can utilise trading losses either by deducting them from any other income chargeable to tax in that year, for example employment and rental income, or by carrying them forward for off-set against the profits of the same trade or profession in subsequent years.
Businesses which cease to trade should also take advantage of the terminal loss relief provisions by setting back the losses of its final 12 months of trading against the profits of that trade in the previous three years.
Individuals or business that hold shares should consider the possibility of utilising any capital losses made on those shares either by crystallising their losses or making a negligible value claim on shares that have become worthless. These losses can be used to offset current gains or be carried forward to use against possible gains in the future.
Improving VAT cash flow
Given the increased delays in collecting payments from customers and the possibility of a reduced turnover, businesses currently accounting for VAT on the invoice basis should consider whether they now qualify for the cash receipts basis.
Any business paying VAT by way of direct debit should ensure that such payments are revised to reflect current circumstances. Direct debits should be kept under review as trading conditions change.
Where a business has accounted for VAT on a debt which is subsequently written off, bad debt relief can be claimed to recover the VAT previously paid (subject to a number of conditions).
Finally, businesses are obliged to account for VAT on receipt of deposits. However, where the customer subsequently cancels and the deposit is not refunded, the business may reclaim the VAT previously accounted for on the deposit. This is often overlooked.
Plan for the upturn
Many businesses are battening down the hatches in an attempt to weather the current economic storm. However, to thrive in the future it is essential that businesses are sufficiently well organised to take advantage of the opportunities that will arise as the climate improves.
Falling asset values present a number of tax planning opportunities to reduce future tax bills. Now could be an opportune time to review your tax situation, restructure the business, segregate activities and assets, and plan for the possible transfer of wealth. Professional advice should be sought before implementing any of the suggestions above.
For further information and advice on any of the above, please contact Carlin McLaughlin & Co., The Business Centre, Lisfannon, Buncrana, Co. Donegal. Tel: +353 74 9364200 Email: info@carlinmclaughlin.ie
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Sunday 12 February 2012
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