The end of the tax year traditionally coincides with a time of expenditure decisions for businesses in the hospitality and leisure sector, as they start to gear up for the peak summer months.
This has been a tax year like few others, with no fewer than four Chancellors of the Exchequer passing through the revolving doors of 11 Downing Street in the past 12 months – bringing with them a tsunami of Budgets, financial statements and ‘fiscal events’.
The result of all of this is a considerable change to various tax structures, which means that careful planning is necessary to take advantage of allowances which might be disappearing, and to avoid paying increased levels of business tax unnecessarily.
One of the biggest changes (taking effect on 1st April) is a hike in corporation tax from 19% to 25% for all companies with profits of more than £250,000. Only the very smallest companies will remain paying 19% (those with profits under £50,000), whilst the effective rate for profits between £50,000 and £250,000 will in fact be 26.5%.
This means that the timing of expenditure could have a big impact. Maximising profits in the current tax year when they will only be taxed at 19%, and delaying expenditure until the new tax year when such expenditure might be offset against corporation tax at 25%, could make a big difference.
It’s not just capital expenditure which can be delayed slightly – staff bonuses can be accrued, and directors’ pension contributions can be delayed (although beware exceeding the annual contribution allowance).
Bear in mind that companies whose financial year does not run from April to March will find their profits taxed pro-rata for the number of months in each tax rate, so finding the right time to undertake expenditure may need some expert advice.
Of course, it is theoretically possible that there will be some kind of U-turn on the corporation tax rise in the Chancellor’s Budget on 15th March – but it would be a risky strategy to leave it that late to do tax year-end planning.
The other big change which will affect businesses in hospitality and leisure is the ending of the so-called ‘Super-Deduction’, through which 130% of qualifying capital expenditure could be offset against corporation tax.
For those who will be paying 25% corporation tax, the 100% Annual Investment Allowance will in effect give the same benefit (because 100% of 25% is almost exactly the same as 130% of 19%), but for smaller companies who will continue to pay a lower rate of corporation tax, taking advantage of the Super-Deduction before it ends could be very beneficial.
Bear in mind also that the Annual Investment Allowance is limited to £1 million each year, whereas the Super-Deduction is unlimited, so businesses likely to spend more than £1 million on capital items (such as large holiday parks renovating accommodation) may also want to take advantage. If you are part of a group or have connected companies, this limit could be further reduced.
Finally, for directors of smaller businesses in the sector, the freezing of personal tax allowances could have a profound effect as well. Falling into the higher rate bracket doesn’t just mean paying 40% tax on income – it can also affect eligibility for things like Child Benefit.
It is possible to declare dividends in the current tax year and ‘bank’ them in Director’s Accounts, using up your basic rate band, but not affecting the company’s immediate cashflow. This can help smooth your drawings across more than one year, whilst ensuring you stay below the higher rate threshold in the longer term.