Decrease the Profit

[Lance]

FTFY

Ask your accountant about Cash Accounting. In other words, revenues and expenses are recorded when cash is received and paid, respectively (and not necessarily when the work was carried out). If you are planning to take a year off after a spectacular year of contracting, it's a way to offset some sales to the next year to take advantage of tax allowances.

I am familiar with cash accounting. Hadn't really thought about that use case to be honest.
But switching between cash and invoice accounting is more than just deciding to fudge some figures.
For a start you can't change for the purposes of an invoice already raised. You need to plan in advance. Which is OK if that's what you want.

But. If you save £2k in tax year 1, you still pay it in tax year 2.
If you suffer a loss in year 2 then you can claim tax back from year 1.
So all in all it's still going to be cost neutral.

[ladymuck]

FTFY

Ask your accountant about Cash Accounting. In other words, revenues and expenses are recorded when cash is received and paid, respectively (and not necessarily when the work was carried out). If you are planning to take a year off after a spectacular year of contracting, it's a way to offset some sales to the next year to take advantage of tax allowances.

A lot of people forget about this as most default to accrual accounting.

To make it even simpler, cash accounting is based on when transactions hit your bank account. Nothing is recorded until that point.

[lecyclist]

What do you mean?

FTFY

Ask your accountant about Cash Accounting. In other words, revenues and expenses are recorded when cash is received and paid, respectively (and not necessarily when the work was carried out). If you are planning to take a year off after a spectacular year of contracting, it's a way to offset some sales to the next year to take advantage of tax allowances.

[Lance]

- Tax offsetting (allocating sales from good years against bad years, typically for those invoices crossing over year end).

a.k.a. FRAUD. You can't just change the dates of sales to gain a tax advantage.
HTH

[lecyclist]

- Tax offsetting (allocating sales from good years against bad years, typically for those invoices crossing over year end).
- Transfer pricing (needs an entity in another tax jurisdiction and a proper understanding of anti-avoidance regulations in both jurisdictions).

[NotAllThere]

Gotta emphasise this. Buying stuff just to reduce profit doesn't make sense.

Exactly. If you really want to reduce profit in a tax efficient way - earn less.

[northernladuk]

Don't let the tax tail wag the dog though. The more expenses you incur to reduce tax is less profit for you.

Gotta emphasise this. Buying stuff just to reduce profit doesn't make sense. It's your money at the end of the day so when you buy stuff it's really just at a 20%ish discount and if it isn't of direct benefit to you personally then you are just wasting your money.

Your accountant should be doing a quarterly review of your accountants and they should be pointing out things you haven't spent on that most contractors do. Stuff like the use of home room etc. Get a call in with them if they aren't and have a top down review.

[ladymuck]

It's also worth noting that most businesses are not "paying VAT", but it is passed through. You agree a price with the customer of £1000. You charge a customer £1000 + VAT, they pay you £1000 + VAT, you pass that VAT on to HMRC.

Yes, very true. I put the gross VAT from my invoices into a separate bank account to keep it entirely separate from funds that are available to myCo. Anyone who thinks the VAT they collect is their money is on a dangerous path...

[WTFH]

Most contractors aren't in the FRS any more, so that's not really something worth calling out for special consideration.

It's also worth noting that most businesses are not "paying VAT", but it is passed through. You agree a price with the customer of £1000. You charge a customer £1000 + VAT, they pay you £1000 + VAT, you pass that VAT on to HMRC.

[ladymuck]

Most contractors aren't in the FRS any more, so that's not really something worth calling out for special consideration.

You could wipe out all of your profit by making up schemes to spend the company's money on but then you won't have anything left to pay yourself as a dividend (as Lance nicely illustrated). Swings and roundabouts...

[Lance]

Salary is also an expense. Just not a very tax efficient one.
Home working expense of £28 a month.
Trivial benefit of £300 per year per director.
Annual staff party of £150 per attendee.
Relevant life plan (company funded life insurance). Talk to an IFA about that.
Health cover (will go on the P11d so has some personal tax implications)



Don't let the tax tail wag the dog though. The more expenses you incur to reduce tax is less profit for you.

Don't make the mistake of thinking that if you have a £20k CT bill you can pay £20k into your pension to wipe out that CT. It will only reduce it by £3,800, whilst reducing the money you can take as dividends by £16,200 (this shouldn't need to be pointed out but, alas, another poster recently posited this idea)

[eek]

Salary Sacrifice into a pension

If really clever an electric car...

Beyond that anything else is an expense that needs valid justification and even then just reduces your profit.

anything you cannot 100% justify opens you up to attacks of tax avoidance - HMRC really don't like TVs and summer holidays appearing as expenses.

[MikeBaco78]

Hi All!!

which is the best way to decrease the profit in order to be more tax efficient?

Below the best way I know:

• travel expenses
• miles
• general expenses
• software
• private pension
• Any other ideas??

You need to consider that I have also to pay a lot of VAT, I am not in to the flat rate scheme.

Is a good idea to buy a small office?

Thank you very much in advance.