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Three tax planning ideas for 2016

03 April 2016

The headline rate of corporation tax is falling, but there are other opportunities for small businesses, like financial advisory practices, to preserve cash

Man and woman working at desk

REWARDING EMPLOYEES

From the start of the new tax year on 6 April 2016, the government will increase the National Insurance contributions employment allowance from £2,000 to £3,000. This could be used toward setting up an Enterprise Management Incentive scheme, a tax-efficient way to award share options to key staff without impacting a company’s cash flow.

There is no tax suffered by the employee or employer on grant of the option. The employing company may get a tax deduction on exercise and there is favourable capital gains tax treatment for the employee on eventual disposal.

Performance milestones can be built in and the options can be structured as ‘exit only’ so employees can only exercise their right to the shares on an eventual sale. As well as the tax benefits, employees will be incentivised and invested in achieving the financial targets of the business.

MANAGING VAT

As value-added tax (VAT) comprises a significant part of a company’s cashflow, it should be proactively managed. If a business raises invoices early in the VAT quarter, it allows cash to be collected before payment is due to be made to HMRC. You could also consider whether your VAT stagger period is appropriate to your circumstances; businesses with seasonal variations in turnover – financial advisers often see a spike in fee income around the end of one tax year and at the start of another – may adversely suffer based on their current return and payment due dates, so a change in the VAT stagger could improve cash flow.

Businesses should also monitor aged debtors, as VAT bad debt relief can be claimed subject to conditions. Under normal circumstances you have to pay any VAT due to HMRC even if invoices haven’t been paid, but those with taxable turnover of £1.35 million or less could consider the benefits of the VAT cash accounting scheme, which allows you to pay VAT on your sales when your clients pay you.

DIVIDEND PLANNING

The effective tax rate on dividends will rise by up to 7.55% for some taxpayers from 6 April. There is also a new £5,000 nil rate band on dividend income being introduced from the same date. For company shareholders who receive significant dividends, consideration should be given to whether it is beneficial to bring dividends forward into the 2015/16 tax year.

Conversely, if a shareholder receives relatively low levels of dividends, it could be beneficial to defer these to the new tax year to take advantage of the new nil rate band.