Avoiding Corporation Tax on Order Placed Just Before Year End? Please Advise!

Hi Guys,

I like to withdraw all profits from my company as a combination of pension and salary before it's year end, leaving next to nothing in the bank, no profits and no corporation tax. It's also important that the abridged accounts show as little profit/bank balance as possible. My year end is the end of April, ie end of next month.

I need to place a large order for stock (the best part of €100,000) in the next week or two, which won't actually arrive till about 3 months time. Now if I place this order I think it will show up as €100,000 of stock at the year end and be liable to corporation tax? It will also show up on the abridged accounts as €100,000 profit which I want to avoid.

Is there a way around this? The way I see it, if the order was placed just after the year end it would not be an issue as the stock would be used up during the year and so gone by the end of next year.

But I kind of need to place the order now and probably pay 60% of it up front.

I was also thinking I could withdraw all profits from the company (as salary etc), loan the money to the company and then pay it back in a couple of months. This would leave me with €100,000 of stock but a debt of €100,000 also so no corporation tax but the large sums of money on the abridged accounts.

Can anyone think of any other way I can achieve what I'm looking to do, ie avoid corporation tax and preferably from having this sum of money appear in the accounts at year end. Pushing the year end date forward is sadly not an option.

Any help would be much appreciated!!

Thanks

Buying up stock close to year end does not generate any profit for you. You spend money purchasing goods and the cost is reflected in closing stock.

If you're having trouble getting your head around this ask your accountant to explain this to you.

Thanks for the reply. I was under the impression this would count as profit in that, if the same €100,000 was sitting in the company account it would count as profit?

In any case is there any way to avoid it showing up on the accounts at the end of the year? It won't technically be stock at that point, it will be stock that has been partly paid for, but not arrived yet!

Thanks

You can't just fiddle the year end accounts to artificially suppress profits or asset positions. Doing so may amount to false accounting and ultimately tax evasion. That said, I think your fears are unjustified. As I said earlier, if you're having difficulty understanding this, ask your accountant.

Thanks again, I had spoken to my accountant and he was of the opinion the money had to be either in stock or in the bank. I'm just looking for a legitimate way around the problem I've described, if possible.

Thanks

CT ( corporation tax) is calculated on any profit for the year. 100k in the bank doesn't come into the CT calculation.

If you order the 100k of stock in the coming weeks and get it in 3 months time,then this won't be in stock at 30th April. Also, assuming you get credit from your supplier, you will not be releasing 100k to him for several months.

If you pay yourself a lot of salary to reduce profit to zero, yes the company will have zero CT, but remember that income tax (IT) at 41% is much higher than CT. Here is a very simplified illustration which shows that paying CT on profits is cheaper than paying IT on salary.


Taxable profit for year before salary €100,000 €100,000
less salary -€100,000 -€50,000
€0 €50,000
CT 12.5% €0 €6,250

IT 41% €41,000 €20,500

TOTAL TAX CT + IT €41,000 €26,750

Thanks Steiner,

I realise that CT is the cheaper option but for quite complicated reasons I need to go the IT route at the moment. I am obviously keen to avoid having to pay CT and then IT.

It I pay for 60k of the order before year end and the remaining 40k after how does it show up in abridged accounts? If it's not in stock on April 30th does it not show up in stock? Where would it go then? Would the 60k show up in debtors?

Ideally I'm trying to have a situation where as little money is evident in the abridged accounts, whether that's in the bank, as a debtor etc. I realise it's quite strange, but I have my reasons

Thanks!

I dont know why anyone is wasting time on this. I think its obvious what the OP is trying to achieve. No cash, No stocks, No debtors. No trail at all basically... Reputable businesses dont operate in this way.

Thank for the reply. I can assure you that I am being legitimate.

To make it simpler, if I make a payment towards an order before the year end but will not have the goods till after year end, how does this show in the abridged accounts?

If it's not stock, is it a debtor? Or there at all? Any advice would be much appreciated.

The transactions you are referring to will affect the balance sheet only . They will not affect the calculation of profit or the tax.

If you have €20,000 in your bank account and you pay for stock with that €20,000, the accountant will reduce your bank account by €20,000 and show it as either a prepayment or as stock. It doesn't matter which.

Brendan

Thanks for that Brendan.

If the stock is being bought out of profits is it liable for Corporation Tax?

I think the real issue for the OP is that the company has generated 100k of cash profit, and in order to minimise this he would like incur an expense (salary / pension cont. or both).

However he needs to buy stock, which as has been pointed out only moves money around the balance sheet, so he's experiencing competing pressures on his finite resource...

Welcome to the world of business Blobert!

blobert said:

Thanks for that Brendan.

If the stock is being bought out of profits is it liable for Corporation Tax?

Click to expand...

NO!

You don't "buy" anything "out of profits" - you have a fundamental lack of understanding here, and you really need to get it straight in your head.

If you have made 100k of profit and you then buy a million of stock, you still have 100k of profit. All that happens in your P&L account is that your purchases have increased by 1m, and your closing stock has also increased by 1m, thereby cancelling each other out.

+ 1 to the above ^^

Here's how to calculate profit (before overheads):

Sales value XXX
Less the result of the following:

Stock @ start of accounting year X
+ Stocks purchased during the year X
-Stocks on hand @ end of the accounting year (X)

{Sum of above 3 values is deducted from sales value} (XXX)

Profit before overheads XXX

So- you can see that purchases are reduced by stocks remaining unsold at year end i.e. if you buy €100000 of stock (and include it in purchases) but it's all left over at year end, then that €100000 will be deducted. This means that your profit won't be affected in the period.

blobert said:

Thanks for that Brendan.

If the stock is being bought out of profits is it liable for Corporation Tax?

Click to expand...

Hi Blobert

This question suggests that you really need to sit down with your accountant and get a lesson in the fundamentals of finance. The question makes no sense.

As you seem to have a good profitable business, you should do a course in finance for non-financial managers.

Brendan

Thanks for that!

I am quite confused by this but I'll have a final go at explaining what I'm trying to get at.

I want to avoid paying Corporation tax on profits and then having to pay Income Tax when extracting money from the company if possible.

Looking at an example where I'm left with no stock at the end of the year:

Sales value 100,000
Less the result of the following:

Stock @ start of accounting year 0
+ Stocks purchased during the year 50,000
-Stocks on hand @ end of the accounting year 0

{Sum of above 3 values is deducted from sales value} (50,000)

Profit before overheads 50,000

VS Where I do have stock left:

Sales value 100,000
Less the result of the following:

Stock @ start of accounting year 0
+ Stocks purchased during the year 50,000
-Stocks on hand @ end of the accounting year 20,000

{Sum of above 3 values is deducted from sales value} (30,000)

Profit before overheads 70,000

Now in the case of the second one the profits are higher but I cannot extract the €20,000 that is stock left over as a salary as it's sitting there as stock.

Thus is this €20,000 of stock not liable for Corporation Tax?

Thanks again for all the advice on this!

Oh dear, I'm afraid the penny just isn't dropping for you on this! Don't take it the wrong way, it'd be much easier if you were sitting across a table from one of us!

In the first case above, you've sold stock that cost 50k, for 100k, and you've got none left. So you clearly have made a profit of 50k.

In the second case, you bought 50k of stock, sold some of it for 100k, and still have 20k of it left. So you have clearly made 70k of profit.

The question you have actually asked is, given that you have made X amount of profit already (be it 50k or 70k as above, which one is actually irrelevant at this point as it has already happened!), what happens if you now go and buy more stock...

And what we are all telling you is that if you buy say 40k of stock, TODAY, then it changes the figures as follows:

Sales value 100,000 - this doesn't change, as you haven't sold anything
Less the result of the following:

Stock @ start of accounting year 0 - doesn't change (obviously, it's a historical figure)
+ Stocks purchased during the year 50,000 - becomes 90,000 (50k + 40k)
-Stocks on hand @ end of the accounting year 0 - becomes 40k (0 + 40k)

{Sum of above 3 values is deducted from sales value} (50,000) - doesn't change because all you've done is increase purchases +40k, and closing stock -40k.

Profit before overheads 50,000 - still the same.

Thanks for your patience

I do really struggle with a lot of the concepts of accounting, I think the course in finance would be a good idea.

Final, final question on this. If I want the company to have minimal profits, cash in the bank and stock at the end of the year etc, would there not be an advantage to placing the order for stock just after the year end?

If I'm buying all the stock for a year at once and buy it all at the start of the year, sell the majority of it during the year, extract profits from the company leaving minimal bank balance and stock at year end would that not work better than buying all the stock for next year now at the end of this financial year and having it as stock at the end of the year?

I'll give up if I'm completely off on this one too

makes no difference whatsoever - Talk to your accountant about other ways to plan against tax -- nearly impossible to do here without your specific circumstances.

I don't know if there's a tax-efficient structure that you can use to extract the money into some fund (pension?), and then use that fund as collateral on a loan next year to buy the stock you need?

What you want to do is make €100k dissapear at the end of year accounts, and re-appear a week later. You're not a certain ex-banker who liked to dissapear his loans at end-of-year, are you?