Due to the current economic climate, taxpayers are finding it more and more difficult to fund the dreaded tax bill. Many businesses are also experiencing a loss making situation for the first time.

Despite the downturn in the economy, there continues to be opportunities for tax savings across many business sectors. The tax burden can be minimised if advice is sought as early as possible.

Stock

Stock and Work in Progress can tie up valuable cash for many businesses. It should be valued in the account at the lower of cost and Net Realisable Value (NRV). The importance of NRV has never been so great, particularly in the property and construction sector where values have been slashed. Where the value of stock is now lower than its original cost we can reduce the value of stock to its NRV which reduces profits and in many cases generates a loss.

Loss Relief

Having Generated a Loss How Can we Get Relief for it?

Offset trading loss against income in current year or previous year

Individuals have the opportunity to offset a trading loss against all other income received in that year and/or the previous year, including capital gains. Similarly, companies can offset their trading losses against all other profits (including capital gains) in the current period and the previous 12 months.

Extension to trading loss relief

As a temporary measure, trading losses can be carried back for 3 years for both companies and unincorporated businesses, subject to restrictions.

Losses are carried back against later years first and against profits from the same trade only. After the carry back to the preceding year, a maximum of £50,000 of unused losses will be available for carry back to the two earlier years.

Group relief for Companies

Losses in one group company can be surrendered to another group company for offset against their profits. Only current year losses can be surrendered and they are available only for the period that both companies are within the group. If the companies do not have coterminous year ends the loss relief available is restricted.

Many businesses should consider if it's now worthwhile restructuring their corporate entities into a group.

Trading losses arising in first 4 years of a sole trade or partnership

These losses can be carried back and offset against total income (including salary) of the previous 3 years, earliest first. The loss cannot be relieved against capital gains.

Losses arising on the termination of a trade

When a loss arises on the termination of a trade, it can be offset against income of the final tax year and can be carried back against trading income of the previous 36 months for individuals and total income for companies. This loss relief is available to companies that cease trade due to liquidation but just as importantly it may be worth considering closing the company, claiming the loss relief and distributing the assets to personal ownership or even incorporating if the existing business was a partnership or sole trade.

Losses to be carried forward

Any losses that cannot be relieved by any other means can be carried forward and offset against future income from the same trade. This is the last resort.

Negligible Value Claims

A capital loss can only be offset against capital gains arising in the same tax period or carried forward for off-set against future capital gains. This applies to both companies and individuals.

If an asset has become of negligible value i.e. its worth next to nothing, then it may be worthwhile considering making a negligible value claim. This will create a capital loss which can be off-set against any current or future capital gains. HMRC publish details of quoted companies where this applies.

However, perhaps more relevant and less used, where an individual or a company has invested in shares in a company that has now failed, a negligible value claim can also be made which will create a capital loss. The loss is available to off-set against any current or future gains. In the case of individuals making negligible value claims, the loss can in certain circumstances be off-set against income.

VAT Bad Debt Relief

Many businesses are being faced with customers not paying or, in some unfortunate cases; the customer has gone into liquidation. Most businesses will account for VAT on an invoice basis, i.e. when the invoice is raised and not when they actually receive the cash. VAT bad debt relief can be claimed in order to recoup any VAT paid over to HMRC if the debt becomes irrecoverable.

In order to make a claim, the debt must be greater than 6 months old and less than three and a half years old. The bad debt must also have been written off in the VAT accounts.

Business Payment Support

If all else fails and taxpayers still find themselves with a hefty tax bill, it may be worthwhile considering negotiating a time to pay proposal with HMRC.

The Business Payment Support Service is aimed at individuals and businesses that are temporarily unable to meet tax payments. HMRC will review the circumstances of each case individually and discuss temporary options tailored to the businesses's or individual's needs, such as arranging to make payments over a longer period.

They will not be charged additional late payment surcharges on payments included in the arrangement, although interest will continue to be payable on those taxes where it applies.

To date, HMRC have been quite flexible in providing real help to businesses through this service. However, they are reluctant to offer payment plans to those who have had a previous plan in place or where they do not believe there is an underlying viable business.

Des Kelly is a Partner with CavanaghKelly, a professional and progressive firm specialising in tax and commercial solutions for business.

Email: des.kelly@cavanaghkelly.com or tax@cavanaghkelly.com

CavanaghKelly Chartered Accountants
38 Northland Row,
Dungannon
Co. Tyrone
BT70 6AP
Tel: 028 877 52990
Fax: 028 877 52909