So, you filed your tax return in time and are feeling pretty smug! Nearly a whole year until you need to think about your finances! Think again. Whether you are a sole trader or a director of a limited company there are a few things that you should be thinking about. Business year end planning can help to put you in a much better position.
Why do I need to do business year end planning?
If you’ve had a good year and your business has made a profit, you can be sure that the tax man will want a chunk of it. There are some actions that you can take BEFORE your year end to reduce your tax bill. Make sure the transactions have hit your bank statement and have been correctly recorded in the current financial year so that they are included in this year’s accounts.
Sensible planning can reduce your tax bill
We all know that spending money will lower your profit. But don’t go out on a massive spending spree, as expenditure is only allowable for tax relief if it is ‘wholly, exclusively and necessarily’ for the purpose of your trade. It also isn’t worth blowing money that you don’t need to spend just to save tax. Keep your eye on the prize – you want your final net income to be as high as possible.
What can you spend your hard-earned profit on to lower your tax bill?
Purchase assets for business use.
If you need to buy new equipment for manufacturing your wares, or if your IT equipment, software, and office equipment are out of date and need replacing, then the best time to acquire new assets is before your year end. You will qualify for capital allowances which can reduce your taxable profits – for certain items you can claim back 100% of the original cost against your tax bill, or up to 130% of the original cost with the Super Deduction which is applicable to relevant expenditure between 1 April 2021 and 31 March 2023. Always check with your accountant if you are unsure of whether expenditure is relevant for these allowances, we don’t expect you to know what is allowable!
Get any equipment repaired or serviced
If it needs doing. Make sure that you get this done and invoiced before your year end.
Claim any outstanding expenses
If you haven’t put your business mileage claim through, or if you are owed money for other items you have purchases on behalf of the business, then make sure you get that expense claim sorted in good time.
Review salaries, bonuses (or dividends)
It is a good time to pay yourself for any work that you have done during the year, or to consider a pay rise or bonus. If you get this sorted before the year end it can reduce your tax liability. Make sure you know what the impact is on your personal taxable income so you can put any tax aside – nobody likes a nasty surprise when they do their tax return.
Invest in a pension
The run up to the end of your company’s year is a good time to think about your retirement planning and to top up your pension. A pension is a good way to both reduce your tax liability and build up a retirement fund for the future. You must make sure that any payments are made to the pension company before your year end. If in doubt speak to an IFA.
Put your business into the best financial position
Its not just about saving tax. Strong business results, as well as feeling really good, will also help if you need to apply for a mortgage or if you are looking for loan funding or an investor to fuel growth.
Push to achieve sales targets
If your business achieves sales targets that helps to support paying bonuses to your team. Finding new employees is particularly challenging right now so keeping your people happy can be business critical.
Chase to get money in from your customers
Turnover is vanity, profit is sanity, cashflow is king. Generating profits is wonderful but you need to make sure you get paid. Call around your customers and ask them to pay before your business year end. This is extra important if you have earmarked money to pay into your pension fund or to buy new equipment.
Business year end checklist
There are other actions you need to take at your year end to make sure you are super organised.
Hold a stock take
If your business has stock (or “inventory”) then you need to know what stock you have on hand at the end of your business year. Make sure you have counted it and checked the condition, and make a note of anything that needs to be written off. You should do a stock take on your last day of the financial year, or as close to the year end as possible. Try to do it on a quiet day when no deliveries of stock come in, ideally at the weekend. After the stock take work out the total value of your stock at its original cost.
Check your fixed assets
Make sure that your fixed assets register (your list of equipment) is up to date and that you have included all your recent purchases! Make a note of anything you sold during the year as your accountant will need to know.
Get your paperwork in order
Pull together a package of information with loan agreements and statements, new lease agreements, and your year end bank statements. Send it to your accountant to keep the follow up questions to a minimum.
Review your debtors
Make a list of your outstanding debtors at the year end. If some of the invoices outstanding are very old and you think they won’t be paid then mark them as a potential bad debt. It may be worth phoning those customers to ask why they haven’t paid, writing them a letter with a final demand, or even engaging a debt collector. Make every effort to collect the money before writing them off.
Check what you owe your suppliers
Make a list of your creditors in due date order (if you use Xero this is an easy report to run). Decide which need to be paid as a priority so you don’t risk upsetting your suppliers. If cash flow is tight then talk to your suppliers and see if you can agree longer payment terms.
Finish the year in style
This probably all feels like a lot of hard work, especially when you thought it seemed like a good time to take it easy with longer and warmer days on the horizon. However, a bit of business year end planning can save you (and your accountant) a lot of headaches as well as potentially keeping your tax bill under control. Go on, it will be worth it!