Pre Year End Business Expenditure and Taxation

Expenditure incurred in the pre year end period is allowable for taxation purposes in that year. Therefore it is generally advisable that where expenditure is scheduled to be undertaken and it can be made either before or after the business’ financial year, it should be made before the end of the year.

This would ensure that the tax benefits of that expenditure are gained sooner in the current year rather than in the next period. In situations where the business is VAT registered it is often to case that the VAT reporting periods and the financial year end of the business are coterminous.

Therefore as well as achieving tax advantages in terms of corporation tax (for companies) or income tax (for sole traders and partnerships), the business can also benefit from the cash flow improvement gained from the extra element of input VAT.

At one extreme, there are businesses who might purchase substantial quantities of goods and services in their pre year trading period in order to inflate their expenses and thereby reduce their profit chargeable to taxation.

Whilst this might appear to benefit them, the resultant creditor balances and the negative effect on cash negates any short term advantages gained via a lower tax charge and reduced VAT liabilities.

Whilst the principles of lowering tax charges through incurring pre year end expenditure generally holds true, the manner in which it is implemented must be in accordance what the business can afford and whet is deeded to be sensible.

For example, purchasing a years worth of stationery might create additional storage problems which removes any taxation gains. There might also be the issue of year end stock which of course is added to profit.

Significant amounts of unused materials or prepayments for services would normally be removed from the profit and loss account as expenses to be allotted to the period in which they are actually utilised.