Before Your Year Ends

QUESTION: I have a small family business that is operated through a limited company with a September 30 year end. With less than a month to go to our year end, are there any things that I should be attending to?

ANSWER: As a director of and shareholder in a limited company there are many items that you should attend to before your year end. A couple of important ones are set out below:

1. Directors loan accounts and dividends.

This area is probably the least understood by people in your situation. Most shareholder directors in the UK remunerate themselves by taking a small salary to preserve their national insurance record and then the majority of their remuneration comes in the form of dividends which not only are exempt from National Insurance but also enjoy a much lower level of income tax. For cashflow reasons, many companies declare a dividend and then credit the total dividend to a directors account with the director drawing the dividend down monthly. The choreography of this process is essential. The dividend must be declared BEFORE the director starts to withdraw the money. If for example you draw down an amount monthly and enter ‘dividend’ in your accounting system (posted often to the wages account) BEFORE you declare and post the dividend to your directors account, you will have a very difficult experience when a PAYE inspector visits your company as he/she will have a very strong argument that the ‘dividends’ are in fact wages and the company will face a hefty PAYE and national insurance bill along with interest and a penalty.

Equally you cannot end the year with an overdrawn directors account and then vote a dividend ‘retrospectively’ and post it to your accounting system to clear your indebtedness – this is illegal. Dividends must be declared ‘in year’ and are only valid if they comply with company law.

I strongly recommend that you have your accountant review your directors account with the company BEFORE the year end. If it is overdrawn, then subject to company law, a dividend could be declared pre-year end to clear it. You may have an income tax bill for the period of indebtedness however it will probably be relatively modest.

2. Pensions

If you intend to make a pension contribution and want tax relief for it ‘in year’ then it must be made before September 30. Pensions cannot be relieved for tax on an ‘accruals’ basis.

3. Capital expenditure

There are generous tax reliefs for investment in plant and machinery. The first £200,000 of capital expenditure may be offset against profits however the company must buy the plant before September 30. Interestingly, if the company acquires the asset before the very last day of your year-end even via hire purchase (but not leasing) the entire cost of the plant is still available for offset against profit.

4. Stock

On the closing of business on September 30 you need to undertake a stock count. Where stock is a significant figure in your business then it’s over/under statement will seriously distort your profit.

Finally remember HMRC’s ‘Making Tax Digital’ era starts next April, and you must move your accounting system into one that will enable you to comply with the new regime.

The days of presenting your accountant with an egg box of books six months after your year end are over. Engage with your accountant/tax advisor BEFORE your year end, they will save you money and help make sure that you are ready for the challenges ahead.