Year End Tax Planning Guide 2020/21: Part 2

As we approach the end of the tax year, now is the time to review your tax affairs to ensure that you have taken advantage of all reliefs available to you and have considered some planning opportunities to help reduce your tax bill.

Our national tax team have worked together to create a handy Year End Tax Planning Guide to give essential tax planning advice for individuals, corporates and SMEs.

Our two-part blog will cover some of the key topics you might find useful when it comes to getting your taxes in order for the coming year. You can read part 1 here. In this blog we cover:

  • Making Tax Digital for VAT
  • Corporation Tax
  • Capital Allowances
  • Enhanced Tax Reliefs

Making Tax Digital for VAT

2020/21 marks the second year of Making Tax Digital (MTD) for VAT businesses. By 9 March 2020 more than 1.4 million businesses had joined
the new service with more than 4 million VAT returns submitted successfully.

Initially mandated for 2020, the requirement for digital links was pushed back until April 2021. As we now approach this deadline, businesses need to ensure the records they keep are linked to their VAT submission software.

Making tax digital for income tax and corporation tax

The date of bringing Income Tax into MTD has now been set for April 2023. This will see landlords and business owners with over £10,000 of income being the first to enter.

Action point: The first and most pressing change is in April 2021 when digital links for VAT become compulsory. Currently these are not compulsory although many businesses already comply.

Corporation Tax

To help businesses through the pandemic, in the short term HMRC had relaxed its criteria for repaying corporation tax where profits had been adversely impacted. This enabled companies that found trading very difficult recover much needed cash.

Corporation tax rates

The UK has a highly competitive corporate tax system and has deliberately sought to be one of the most competitive amongst the G20 nations. Corporation tax rates are currently 19% for all UK companies.

Income and expenditure

The general tax planning strategy should normally be to defer income and make full use of all available allowances and deductions. If liquidity is not a concern some thought should be given to when relief is claimed if it becomes apparent there is a need to mitigate the effect of higher tax
rates in the future.

Research and development tax relief

Companies carrying out qualifying research and development (R&D) activities can save corporation tax, depending on the costs incurred. Only companies can claim this relief.

Capital Allowances

Annual investment allowance – extended to 31 December 2021

As part of the measures intended to assist businesses with the impact of Coronavirus, the Chancellor has again temporarily increased the annual investment allowance (AIA) to £1m, which means that the first £1m of qualifying expenditure can be relieved in full in the year it is incurred.

However, this increase is temporary and is again scheduled to reduce to its former allowance of £200,000 from 1 January 2022. The AIA is not as straightforward as it may seem, as the allowance must be pro-rated depending upon your year end. For instance, if you have a year end of 31
March 2022
you would be entitled to:

Action point: If your company is incurring capital expenditure, it is important to seek specialist advice to ensure the AIA is correctly applied and the relief maximised. It is also important to ensure that the timing of the acquisition of the asset is considered and that you do not miss out on the substantial savings available by falling into the period with a lower available AIA.

Enhanced capital allowances

With the exception of capital expenditure in respect of electric car charging points, the Enhanced Capital Allowances (ECAs) regime was abolished from April 2020.

As there is a two-year claims deadline, businesses should review fixed asset expenditure in 2018 and 2019 to identify any ECA qualifying plant and machinery acquired up to 31 March 2020 where a claim could still be made for 100% first year allowances under the ECA regime.

Structures and buildings allowance

A new form of relief was introduced following the Autumn Budget 2018, this relief awards a 3% (originally 2%) writing down allowance (on a straight-line basis over 33 1/3 years) against the cost of construction of non-residential properties or the elements of a mixed-use building which are non-residential. Although not dissimilar to the industrial buildings allowance, the new regime covers a much wider sector of construction.

Enhanced Tax Reliefs

Research and development

Small and medium sized enterprises (SMEs) are given an enhanced deduction against tax of 230% of the actual eligible costs incurred, with the chance of actual cash refunds in loss making situations.

For large companies, the basic tax relief is an “above the line” taxable credit of 13% from 1 April 2020 (12% from 1 January 2018 to 31 March 2020) of qualifying expenditure.

In some cases, small or medium sized companies may be able to claim under the large company scheme if they are precluded from the relief available to small and medium sized companies.

Patent box regime

The patent box provisions introduced in 2012 can also currently be utilised to reduce tax following R&D activities that culminate in patented innovations. The Patent Box regime is being phased in to effectively apply a 10% tax rate to all profits attributable to products, processes or royalties that carry or include a qualifying patent.

Action point: Companies should consider whether they could benefit from being taxed under the patent box regime and make the appropriate election within the deadline, which is generally two years from the accounting period end.

Land remediation relief

Relief can be available on the cost of cleaning up land which had been acquired in a contaminated state. The relief is 150% of the costs incurred and can apply irrespective of whether the costs have been treated as revenue or capital in the financial statements.

Read the full guide

If you have any queries about how any of the above may impact you or your business please get in touch with a member of our tax team on 01903 234094.

The purpose of this guide is to provide technical and generic guidance and should not be interpreted as a personal recommendation or advice. The value of investments can go down as well as up and you may not get back the full amount you invested.