Planning for corporation tax.

Around a quarter of the companies in the UK have a December year-end, and most of those will have only seen their 2022 year-end results and corporation tax liability shortly before last weekend’s deadline for filing annual accounts and paying corporation tax.

Regardless of the year-end date, every month agency owners get little notice of the corporation tax payable. Everything can feel comfortable with what may seem to be a healthy bank balance and then comes this nasty shock! It’s made worse that many agencies are having a difficult 2023 and must pay corporation tax on what was a better previous financial year.


How having management accounts prepared can prevent shock

Corporation tax is payable for most companies nine months after year-end and so it is 21 months from the first month of profit being made to when the tax becomes payable. One of the many advantages of having management accounts prepared is that a reliable estimate of the corporation tax liability can be provided each month or quarter. The agency owners I work with get a clear view of the corporation tax payable within the next year and beyond. It allows them to put aside corporation tax regularly or if cash flow doesn’t permit, it at least keeps it front of mind and a plan can be made.

Once the final set of management accounts have been prepared, the annual accounts are ninety-something per cent complete. Unless there’s a complication or uncertainty, the annual accounts and corporation tax return can be finalised soon after and not be left right up to the deadline!


Tips on how to save for corporation tax

The challenger banks make it easy to put money aside – Starling has Spaces and Monzo has Pots enabling you to separate funds from your main balance. When you add funds to a space or pot, the bank balance you see on your account is after the money in spaces or pots has been deducted. This helps you to see the value of cash that is free of obligations.

It may make more sense to open one or more deposit accounts on which interest can be earned. Interest rates haven’t been this high since 2008. Interest earned will in part reduce the erosion of the company’s money caused by inflation. I was recently told by a contact at our savings and funding partner that there are instant access business accounts which are offering in the region of 5%. You’ll get a better interest rate if you lock the cash into a fixed-term account, however, you need to consider whether you may need access to the cash.


What to do if you have a cash flow problem

Should you ever have a temporary cash flow problem then the spaces/pots or instant access deposit accounts can be dipped into if need be. If you don’t have the cash to pay the corporation tax liability then it is best to get in touch with HMRC as soon as possible. Our clients have had success when asking HMRC for a ‘time to pay’ arrangement, especially when they can explain the cause of the temporary cash flow problem and how they plan to remedy it.


Please get in touch should you be interested in learning more about our regular management information packs tailored for agencies which help you plan for taxes or if you need help to improve your agency’s cash flow.

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