If you are a dental or medical business owner wanting to grow your business profits whilst still saving tax, Financial Forecasting is essential. Michael Lansdell, from Lansdell & Rose specialist dental and medical accountants, discusses here the reasons, and, gives 6 key ways to reduce tax through forward planning.
The views expressed in this article are specifically those of Lansdell & Rose Accountants.
Financial Forecasting – mapping sunshine and rain
“Financial Forecasting” simply means making educated predictions towards your business activities for the coming months and years so you can be clever and maximise all possible tax breaks available to you, whilst at the same time continuing to boost your profits to the next level.
It is like a weather forecast where you can plan ahead according to the results and start to see seasonal trends and situations where you are set to gain, or lose.
“Don’t Let the Tax Tail Wag the Investment Dog”
It is logical that as profits rise, so typically does the tax liability.
This is a frustration for many healthcare professionals, some even choosing to restrict their profits and therefore cap the success of their business, so as not to pay more tax.
“I tell my dental and medical clients, paying tax is in fact a sign that the business is doing well. However, there are ways where profits can grow yet tax increases are minimised. It takes forward planning though as many tax breaks need time to be implemented effectively.” Mark Ibbotson, Tax Specialist, Lansdell & Rose medical and dental accountants
Lansdell & Rose are specialist medical and dental accountants with a key focus on tax planning for healthcare professionals.
Contact Michael today for bespoke tax advice
6 Key ways to reduce tax through forward planning
Whilst every practice is different, there are a few key ways to reduce both business and personal tax through forward planning and forecasting business activity.
- Plan business expenditure and ensure all tax-deductible expenses are being claimed against profits.
Costs within a business can easily escalate out of control without a budget and a formal Financial Forecast is a practical way of budgeting.
Similarly though profits can often be higher than they should be at the end of the year and therefore taxed inefficiently if costs are missed through lack of planning. Understanding business expenditure patterns and planning cost activity helps to maximise tax relief whilst ensuring expenditure is necessary.
Remember, there is no merit in spending for spending sake, even if it does reduce tax.
- Timing of capital expenditure purchases
Timing the purchase of capital expenditure, such as dental and medical equipment, computer equipment or fixtures and fittings for your practice, can be an effective way to save tax for certain tax periods. For example, the Annual Investment Allowance, which is due to be decreased from £500,000 to £200,000 on January 1 2016, shows how timing can be applied to maximise tax relief.
- Dividend planning for directors of limited companies
The timing of withdrawing funds from your limited company can have a negative or positive effect on personal tax. This needs careful planning with an accountant to ensure you are not missing a trick.
- Timing of recruitment and resource management
Hiring new staff can be costly to a practice, especially if the timing is not right. An added salary on the books when there isn’t sufficient income can result in a dip in profits. Forecasting income levels in the coming months and years helps to support decisions for recruitment and ensure that the tax relief received on the deductible wages expenses will match the benefits of increasing your income and profits.
- Business expansion and investment timing
Many dental and medical practices get to the stage where they wish to expand. Whether that involves moving to new premises, expanding existing premises or opening another practice, timing is crucial.
Forecasting the impact on both income and expenditure will ensure decisions are educated. There are numerous tax opportunities when making bigger investment choices. These could be linked to methods of funding, “when, where and how” to expand or the continued business structure.
Planning is the only way to ensure tax is minimised.
- Forecasting to ensure tax payments can be met
Finally, Financial Forecasting can predict future profits and therefore calculate future taxes, to quite an accurate level when prepared properly. Cash flow through your business can also be forecasted to ensure tax payments can be made on time, and unnecessary charges and interest will not be incurred.
Free template available
Financial forecasting is not a one off activity. It needs regular attention and updates. Every three months is recommended but many larger and successful practices will update their forecasts every month.
Start today – Contact the team at Lansdell & Rose to be sent a link for your free download. Or visit our website for more details.
Read more tax saving tips from Michael
- 7 last minute tax planning tips for 2016
- How the new dividend rules affect you
- Buy-to-let investors face cuts in tax relief