High profits one year, low the next; how best to manage corporation tax?

[TheCyclingProgrammer]

Depends how you invoice and recognise income.

If you are on a monthly gig then not a lot you can do.

If you are on a "results" or milestone gig then making the final task "spill over" into the next financial year by a couple of day means you'd be invoicing the final payment in Y2 not Y1 - hence reducing Y1 income and increasing Y2 income

Unless you care about the "vanity" of always making a profit it doesn't make a blind bit of difference in the end. You pay 19% tax on profit (this year and next at least - can change in the future). When you earn it just affects when you pay it - that's the only difference

Accounts are prepared on an accruals basis. Strictly speaking in the scenario above you should account for work in progress at the year end as an accrual that hasn’t been invoiced so the income for that work is recognised in the correct financial year.

[deserted]

Thanks very much

Thanks for all your help guys!

I think I made a basic mistake here: what I was (foggily) thinking about was somehow deferring the *revenue* from one year to the next. So in that case I could balance the revenue in different years, pay myself the allowance each year and that way pay reduced corporation tax.

I appreciate that this is probably a ludicrous proposition.

But this thread has been very helpful, the main message being that if you want to reduce tax, you need to do *tax planning*.

[oilboil]

Accounts are prepared on an accruals basis. Strictly speaking in the scenario above you should account for work in progress at the year end as an accrual that hasn’t been invoiced so the income for that work is recognised in the correct financial year.

Not if the money only becomes payable on completion as you cannot guarantee that you will complete the work.

I agree if you are billing a day rate (or similar style) over the accounting period - but there isn't a sensible way to apportion milestone payments as the client owes you "nowt" right up until you trigger the milestone

so either would be acceptable to Mr HMRC

[jamesbrown]

Depends how you invoice and recognise income.

If you are on a monthly gig then not a lot you can do.

If you are on a "results" or milestone gig then making the final task "spill over" into the next financial year by a couple of day means you'd be invoicing the final payment in Y2 not Y1 - hence reducing Y1 income and increasing Y2 income

Unless you care about the "vanity" of always making a profit it doesn't make a blind bit of difference in the end. You pay 19% tax on profit (this year and next at least - can change in the future). When you earn it just affects when you pay it - that's the only difference

I see two pages of replies, so this may have been addressed already, but that isn't correct. You need to account for work in progress at year end, and CT on that amount will be paid in the current year. Ordinarily, this makes little difference (just a question of timing), but it will make a difference come April 2020 when the CT rate reduces to 17%.

[jamesbrown]

Not if the money only becomes payable on completion as you cannot guarantee that you will complete the work.

I agree if you are billing a day rate (or similar style) over the accounting period - but there isn't a sensible way to apportion milestone payments as the client owes you "nowt" right up until you trigger the milestone

so either would be acceptable to Mr HMRC

Again, not true. I frequently work fixed price, and you need to account for the work in progress at year end, regardless of the terms of your contract with the client, to which HMRC is not party (i.e. it is irrelevant). There is invariably a very sensible way to apportion, and that is to determine what percentage of the work has been done! If you can't estimate that, the client probably made a big mistake.