Reducing Liabilities and Boosting Cash Flow

As the financial year-end approaches, many business owners find themselves scrambling to prepare for the tax season. The end of the tax year, especially on 31 March for companies, presents a prime opportunity for strategic tax planning. For owner-managed businesses, effective tax planning can translate into significant savings. In this article, we’ll walk through key tax strategies to implement before your year-end.

While most of these strategies focus on reducing corporate tax liabilities, it’s essential not to forget about the owner’s tax position as well. Taking a comprehensive approach to your business’s tax planning will give you a significant edge as you move into the next year.

1. Managing Trade Receivables: Is Debt Holding You Back?

Businesses using the accruals method of accounting need to keep an eye on their trade receivables. If certain amounts are unlikely to be collected, it may be time to write them off or formally release them from the books. Doing so can potentially reduce taxable profits and help clean up your accounts.

For businesses with connected companies, debt write-offs can still trigger tax relief. However, be careful — if the creditor is a corporate entity, the tax relief may not apply, or the credit could be taxable to the debtor company. This makes it crucial to regularly review your trade receivables to identify bad debts and optimise your tax position.

2. Cash Flow and Provisions: Manage Future Liabilities Today

If your business anticipates any post-year-end payments or potential liabilities, consider creating a provision within your year-end accounts. This provision, if properly accounted for, will be tax-deductible, helping to reduce taxable profits. However, be mindful that only the right type of provision is deductible under tax rules.

Businesses on the cash basis should note that provisions aren't necessary, as only actual payments count toward expenses.

3. Accelerating Expenditures: Maximise Deductions Before Year-End

One of the most effective ways to reduce taxable profits is by accelerating deductible expenditures. For instance, capital expenditure expected in the upcoming year may be brought forward to the current year to increase deductions, especially if you are working with the accruals basis. For businesses using the cash basis, you can deduct the full business proportion of qualifying assets in the year they are purchased, excluding cars and buildings.

Don't forget that paying interest on loans from owners is another way to reduce your tax liabilities. However, interest payments must be made within 12 months for them to be deductible for tax purposes.

4. Directors' Loans: Plan to Avoid Unexpected Taxes

For businesses operating as close companies, directors' loans can become a source of concern when they remain unpaid nine months after the year-end.

If there are outstanding loans from directors, businesses need to be aware of the 33.75% tax ‘deposit’ that will be due to HMRC on unpaid loans. Repaying these loans before the year-end can help avoid this tax and reduce the risk of added tax deposits.

5. Pension Contributions: Don’t Miss Out on Deductions

For businesses operating as close companies, directors' loans can become a source of concern when they remain unpaid nine months after the year-end.

If there are outstanding loans from directors, businesses need to be aware of the 33.75% tax ‘deposit’ that will be due to HMRC on unpaid loans. Repaying these loans before the year-end can help avoid this tax and reduce the risk of added tax deposits.

6. Managing Losses: Turn Losses into Tax Relief

If your business is facing a loss for the current period, consider whether carrying it back to previous years might be a smart move. For unincorporated businesses, losses can typically be carried back for 12 months to generate a tax refund, providing a valuable cash flow boost. While sole traders and partners can carry losses back without first offsetting them against other income, companies must first offset the loss against other income before carrying it back.

By acting before year-end, you can receive a tax refund and improve cash flow in the short term.

7. Review Prior-Year Tax Returns: Are You Leaving Money on the Table?

It’s also wise to review your previous year’s tax returns to identify any missed opportunities for claims or reliefs. You have up to 12 months from the due date of the return to make amendments, so now is the time to consider whether any previous returns need to be adjusted. Perhaps additional claims for tax relief can be made, or you might be able to carry back losses for a refund.

If loans have previously triggered a tax deposit, paying them back before the current year-end can result in a refund of the deposit.

8. Forecasting for the Year Ahead: Prepare for New Tax Responsibilities

Looking ahead, it’s essential to consider the impact of the upcoming budget and whether your business will be required to make corporation tax payments by instalments. If your business is at risk of crossing the threshold to become a “very large” business, you could face tax payments throughout the year, creating potential cash flow challenges.

Review your tax forecasts carefully and adjust your budget to ensure you’re not caught off guard by new tax obligations.

9. The Dangers of Overspending on Client Entertainment

As a business owner, it’s easy to go overboard on client entertainment, but this type of expenditure is often scrutinised by tax authorities. Ask yourself: Is the amount spent providing a tangible benefit to the business, or is it simply a way to build relationships? Tightening your client entertainment budget can both increase profits and reduce taxable liabilities. It's a simple yet effective way to improve your bottom line without having to increase income or raise taxes.

10. Don’t Forget Compliance Deadlines

Finally, make sure you’re aware of all relevant compliance deadlines — especially for income tax returns, corporation tax filings, payroll compliance, and other employer-related obligations. Missing deadlines can result in penalties, and in some cases, additional tax liabilities. Set reminders and start early to avoid the rush.

Closing Thoughts

By considering these tax-saving strategies and planning ahead, you can reduce your tax liabilities, improve cash flow, and avoid future tax pitfalls. Remember, tax planning is not just about reducing liabilities—it’s about making informed decisions that set your business up for future success. Start planning today, and make sure your business finishes the year on the best possible financial footing.

Contact The Tax Faculty today for bespoke advice on maximising your tax efficiency.

Capital Gains Tax Expertise: The Tax Faculty LLP Managing Partner Charles Tateson Named UK Capital Gains Tax Advisor of the Year 2023

The Finance Monthly Taxation Awards recognises the achievements of tax professionals from around the globe.

Winning such an award is no small feat. It is a reflection of hard work, extensive knowledge, and an ability to navigate the intricacies of the UK tax system.

Read more about Charles and the award here.

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