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Enhance your business and partners’ personal tax planning for January 2016.

Home- Insights- Guides- Enhance your business and partners’ personal tax planning for January 2016.

Some New Year business resolutions or perhaps just simply a reminder checklist of best practice previously promoted to help you manage your firm’s cashflow, remembering that cash is always king!

Tax Payments

Practices will be searching (or perhaps even borrowing) to pay balancing tax payments at 31 January 2016 on (generally) improved results in the accounting period that ended in the 2014/15 tax year.

In addition there may be increased payments on account adding to the pain. So how come you do not
have the cash sitting there with you all smugly writing out cheques? Perhaps because other people still have your money?

Therefore, once again, time to focus on the following –

Improve your credit control

Ensure your credit control department is adequately resourced, empowered and supported by all fee earners. Monitor your collection procedures to speed up collection of fees and thereby reduce the potential impact of bad debts. Once again, (your) cash is king!

Work in progress (WIP)

Encourage all fee earners to fully record their time and not making billing decisions when posting time.

Agree in advance with your clients to interim bill and always raise fees at the height of client’s satisfaction.

At the completion of a good job you are more likely to be able to bill your full costs and you will collect your cash quicker. Fee earners should be regularly reviewing the WIP on their portfolios for billing opportunities and looking to hit debt and WIP day’s targets. All firms should aim to be ahead of their own debt and WIP day targets. If you do not bill it, you do not get paid.

Sectors

Monitor your combined WIP and debtor exposure to clients in sectors that are particularly struggling in this present economic environment. Any major oil clients? Or perhaps even major supermarkets or other retailers struggling due to a lack of online presence.

Exposure limits

Set limits for exception reporting with individual partners where combined WIP and debtors on clients is above pre agreed limits.

Communicate with your customers

Regularly communicate with your clients to keep them fully informed of all matters and aspects of their cases and assignments, and get agreement to any additional fees before they are incurred.

Monitor your expenditure

Keep close control on expenditure and consider where savings could be made. Carefully consider any capital expenditure that is not vital.

Returning to tax payments

Back to where we started, many firms are still finding the present climate a challenge so do consider your likely results during the basis period 2015/2016 as payments on account may be able to be reduced; a useful cash flow saving appreciated by individuals and the practice.


Partners’ drawings

It may be that you need to assess the sustainability of the level of Partners’ drawings; not always the easiest of discussions but necessary if the funds are not there. This often acts as a decent encouragement to improve lock-up control.

Looking at tax matters associated with the practice’s taxable profit, the following reliefs should also not be overlooked:

Capital allowances – do not waste your allowances

You should be monitoring capital expenditure not only to ensure non-essential is deferred but also to ensure you effectively use the 100% Annual Investment Allowance (AIA) and on energy efficient items. This AIA has been “temporarily” up to £500,000 from 5 April 2014, but from 1 January 2016 is now a permanent £200,000. Those partnerships with corporate members will be aware that AIA is not available to them.

Building purchase and improvements

Do not forget that your building purchase and any improvements may incorporate a substantial qualifying spend for Capital Allowances thereby reducing tax payable. If you are about to (or in fact already have) undertaken any significant expenditure on your building this relief can be very valuable. These allowances are often missed so please contact us to arrange a review.


Dividends

Many law firms have, in recent years, incorporated and use dividends as a method of efficiently extracting funds from the business.

These rules change from 6 April 2016 and advice should be taken to plan for this increased exposure, broadly adding 7.5% to the tax effect of receiving dividends at all levels. Turning to more specific individual tax matters and relief :-

Capital contributions

Due to the changes in “disguised salary” rules for LLPs a little while back, more Partners are likely to have borrowings to fund capital. Therefore, it is important to ensure that these are communicated to your tax advisors so that interest on any borrowed funds at 5 April 2015 can be claimed as a deduction against your taxable income.


Likely income levels

Practices may have accounting year-ends forming the basis period for 2015/2016 that have already ended. Therefore, consider the higher rate thresholds of £100,000 to £121,200 (60%) and greater than
£150,000 (45%) and any tax planning opportunities arising.

Examples of such opportunities would be:-

Pension payments

Whilst not suggesting the present market is a buying opportunity (no advice given here, we hasten to add!!) but any pension contributions before 5 April 2016 could lead to a reduction in the highest rate of tax payable for individual partners. Menzies Wealth Management could assist here. Additionally, for people earning above £150,000, this is the last tax year where the full £40,000 annual allowance will be available. For those above that threshold contributions eligible for tax relief are tapering down for the tax year commencing on 6 April 2016 to a minimum of £10,000.

Gift aid

With the tax thresholds in mind do not forget to record your gift aid payments as these can be very valuable. A donation of £80 allows the charity to claim a further £20 of income tax off HMRC. If you are a 40% tax payer then you can also claim a further £20 from HMRC. In addition contributions paid prior to the submission of your tax return (i.e. in the new tax year) may be carried back to the previous year and thus reduce your tax bill. For those considering more substantial donations, then some careful planning can reap substantial tax savings.

ISA’S

Up to £15,240 can be annually put into an ISA. The annual deadline for investing into an ISA is 5 April
2016.

Capital gains tax annual exemption

Gains of up to £11,100 can be made in 2015/2016 before any tax becomes payable. With some asset values/sectors (there are some, honest!) having appreciated greatly in recent years, it may be that you are lucky enough to possess assets with a pregnant gain. Therefore consider which assets could or should be sold prior to 5 April 2016 to take advantage of this tax-free amount, which is per person and available to both husband and wife.

Inheritance tax annual exemptions

Gifts of up to £3,000 per year can be made on a tax free basis. The limit increases to £6,000 if the previous year’s annual exemption was not used, and do not forget gifts out of income.

This publication has been prepared only as a guide and is not intended as advice. No responsibility can be accepted by Menzies LLP for any loss from acting or refraining from acting as a result of any material in this publication.

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Peter Noyce - FCA

Partner

Peter Noyce is a Menzies Partner in the Woking office specialising in legal firms, corporate tax advisory services and financial solutions.