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

[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.

[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%.

[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

[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*.

[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.

[craigy1874]

But divis are paid out of post tax profits. So if you make more net profit over two years by carrying back a loss in the second one, you get a bigger pot of retained profits to pay divis from , surely...?

Eh?

[malvolio]

I don't really see what the problem is. Simply ensure you set aside sufficient funds from the good year so the CT liability can be paid when it falls due.

If this were personal tax then yes I agree it can make sense to do something a bit more quirky. Reason being you'll pay a far higher overall tax bill if (for example) you earn £100k one tax year, £nil the next, as opposed to £50k each tax year. The same isn't true for corporation tax, as currently it's the same rate regardless of profits.

So take a bit of care with dividends, it may well make sense to drip feed those across the two years...but the company's profits, doesn't really matter.

But divis are paid out of post tax profits. So if you make more net profit over two years by carrying back a loss in the second one, you get a bigger pot of retained profits to pay divis from , surely...?

[northernladuk]

I don't really see what the problem is. Simply ensure you set aside sufficient funds from the good year so the CT liability can be paid when it falls due.

If this were personal tax then yes I agree it can make sense to do something a bit more quirky. Reason being you'll pay a far higher overall tax bill if (for example) you earn £100k one tax year, £nil the next, as opposed to £50k each tax year. The same isn't true for corporation tax, as currently it's the same rate regardless of profits.

So take a bit of care with dividends, it may well make sense to drip feed those across the two years...but the company's profits, doesn't really matter.

That's what I was gonna say but you beat me to it.

[Maslins]

I don't really see what the problem is. Simply ensure you set aside sufficient funds from the good year so the CT liability can be paid when it falls due.

If this were personal tax then yes I agree it can make sense to do something a bit more quirky. Reason being you'll pay a far higher overall tax bill if (for example) you earn £100k one tax year, £nil the next, as opposed to £50k each tax year. The same isn't true for corporation tax, as currently it's the same rate regardless of profits.

So take a bit of care with dividends, it may well make sense to drip feed those across the two years...but the company's profits, doesn't really matter.

[fiisch]

You've definitely already thought of this, but I'd make two years worth of pension contributions this year and none the next...

[m0n1k3r]

Ermm...

Happy if an accountant would confirm it, but you can offset previous years' CT agaisnt in year losses and claim a partial refund...

Yes you can, and you can also amend last year's CT against the current year and roll back losses in one year against a previous year's CT and get a refund.

Example:

2017: £1m profit
2018: -£250k loss

Roll back the -£250k to 2017 and declare the following:

2017: £750k profit
2018: £0

[malvolio]

Ermm...

Happy if an accountant would confirm it, but you can offset previous years' CT agaisnt in year losses and claim a partial refund...

[oilboil]

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

[WordIsBond]

No, there's not really any significant way to do it (for a one-man contractor company, anyway) and it doesn't matter, anyway. Your company will pay the same amount of tax whether it has £1 million in profit this year and zero next, or £500K each year.

A DL has no bearing on profit/loss and corporation tax.

You could pay yourself more salary this year and less next, but that would increase your personal taxation.

[deserted]

Hello!

I'm lucky that this has been a good year for me with high profits (and subsequently high corporation tax).

Next year revenue will drop to near zero (by choice).

I'm wondering if there's any way of evening this out - 'defer' profits until the next tax year, director's loan or something?

Thanks for your help!