| Managing the downturn |
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| If you feel you may be facing a downturn in business, consider how you may use the tax system to help you through it. |
In a downturn any business needs to review its costs with a view to reducing them. Tax is a considerable cost on every business. It is one area worth looking at to secure savings, especially as so little benefit is obtained from it.
Some businesses think that ‘tax’ can be equated with corporation tax. The tax cost on a business is spread far more widely, and correspondingly the opportunities for savings are more widely spread. Many tax savings, which can be made, are tax savings that could equally have been made in good times. But in good times businesses can sometimes loose focus on cost control or are too busy to do anything about it.
Staff costs
PRSI is a major element of staff cost. In the current year (2003) employers’ PRSI is not charged on non pecuniary emoluments eg benefits in kind, shares and share options. If you have bonuses coming up, or salary increases to be negotiated, can you negotiate them in a form that does not attract PRSI?
Even in 2004, when employers’ PRSI will apply to benefits in kind, it still will not apply fully to all non-pecuniary emoluments. A review of the make-up of a salary package can yield savings.
Have you considered an approved profit sharing scheme? An approved profit sharing scheme is capable of yielding to an employee tax free emoluments up to €12,500 a year. A tax-free emolument doesn’t attract PRSI and the income tax and PRSI saving ought to be capable of being shared out in a way which curbs salary increases.
If your share price is currently depressed, is this a good time to remunerate employees in shares or share options? If it is, you may have a cash flow saving and a PRSI saving, and (depending on how accountancy rules finally are determined) potentially a favourable impact on the profit and loss account.
Property
Whether you are buying property, or selling property, the 9p.c. rate of stamp duty is going to represent a cost to you. If you are a buyer, you have to pay that stamp duty. If you are a seller, the value of your premises is depressed by the fact that the purchaser has to pay it. Stamp duty is not an inevitable cost of a property transaction. With proper planning it can be avoided or mitigated. Don’t enter into a property transaction without having obtained stamp duty advice.
Look again at your properties. Have you maximised your capital allowances on those properties? Are you sure that the element of the properties which are properly, for tax purposes, to be regarded as plant and machinery, have been fully identified, and that the full cost attributable to those plant items has been correctly analysed? In the experience of KPMG’s capital allowance specialist group, a building review can yield substantial increases in capital allowances. This can apply to existing buildings just as much as it can to buildings about to be purchased or constructed.
Financing costs
The value of tax relief on interest expense can vary from an effective 10p.c. to an effective 25p.c., depending on how a group and its financing is structured. In the case of careless structuring, interest relief may be entirely lost.
Particularly where a group is operating in more than one jurisdiction opportunities may exist in the interaction of the different taxation systems involved, to further reduce the real cost of financing an operation. Is it possible to obtain a deduction for some expenditure in more than one jurisdiction?
Do you find that you are generating interest income on surplus funds, as well as paying interest on borrowings, either simultaneously, or at different points in the year? If so, it is likely to be the case that the interest income may be attracting an effective tax rate of as high as 40p.c. in a close company, whereas the interest expense may be relieved at as low a rate as 10p.c. A review of your arrangements with your bank can help to ensure that this inefficiency is eliminated.
VAT and Customs
Are you making maximum use of VAT grouping to avoid cash flow outlays in accounting for VAT in one company on inter company charges, while waiting for recovery in a later period in another company? Are you making maximum use of 13A authorisation to avoid VAT on imports and costs generally? Are you making use of inward processing suspension regime on materials imported for re export? Have you considered the use of customs warehousing to defer VAT liability on imports?
If you import goods from outside the community, you are likely to be a payer of customs duty. Do you know how much customs duty you paid last year? Are you aware of the full range of customs reliefs (some of which may exist for short periods in a year only), which are available? Have you explored resourcing your imports so as to reduce customs costs? Have you had the import classification reviewed to see if you might be entitled to a lower rate of duty? Such a customs review can yield substantial savings to a business and can be especially relevant if substantial items of plant or equipment are being imported.
If you are a VAT exempt undertaking, have you discussed means of reducing your irrecoverable VAT costs on purchases of goods and services?
CAT
If you are planning to transfer a business to the next generation, a business recession with consequent reduced values on the business, may be a good time to consider it.
And lastly
The last thing is to at least get the most advantage from the timing of your closedown if, sadly, that is necessary. If you close down after three years of losses, you will find little or no use for those losses, in terms of obtaining relief. If your closedown occurs in the first year of loss following years of profits, the loss can be carried back over the previous three years to obtain relief which in some cases can be at tax rates as high as 20p.c., in contrast to the current 12.5p.c. rate. |
Pat McDaid is a partner in KPMG.
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| Article appeared in the May 2003 issue.
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