What is Tax Planning?
Tax Planning is minimizing your tax liability by making the best use of all available deductions, allowances, rebates, thresholds, etc as permitted by income tax laws, rules stipulated by the government of a country. It helps in effective cash flow and liquidity management for taxpayers and better retirement plans and investment opportunities.
Types of Tax Planning
Now let’s discuss the 3 different types in detail.
- Periodic Planning – Tax planning can either be of short or longer period of time, if done for less than 12 months, is known as shorter period planning, whereas planning done for more than 12 months is known as longer period planning. For example, there are short term and long-term capital gains taxes depending upon the holding period of assets/investments.
- Liberal Planning – Here, the planning conforms to law provisions of tax and distinguishes the same with tax evasion or tax avoidance.
- Intended Planning – This method is based on loopholes in the tax laws and unexplored areas.
Changes in Tax Planning
- The consequences of tax changes should be anticipated and considered as you evaluate choices for financial strategies. You can usually be aware of any tax law changes well in advance to incorporate them into your planning.
Tax deductions, allowances, and slab rates tend to frequently change every year as per the economic scenario and taking into government fiscal targets. These changes must be kept in mind while doing tax planning as a ready reckoner.
- Changes in tax laws are brought in sometimes to boost the economic scenario, infrastructure growth, and industrial development. For example, recently, the scope of capital gains tax in the UK for Non-UK residents was extended to include all disposals of UK property. These are just the first in the line of reforms coming down the track in the next few years that will have a significant impact on landlords.
Tax planning has numerous advantages and lesser disadvantages. They should be done within the applicable limits of tax laws and clearly distinguished with tax evasion or tax avoidance, both of which are not allowable under the applicable limits of tax laws. Also, any changes in tax laws should be kept into consideration.
They can only be done up to a certain amount limit as per the thresholds fixed by the government tax laws. There are many tax-saving financial products available in the financial markets. Those products need to be evaluated with pros and cons before buying the same and whether it can actually lead to tax savings or not.
Tax Planning Vs Tax Management
It’s critical that you understand the difference between the two!
What techniques your business is currently utilising? Is it Tax Planning techniques, Tax Management techniques or even both! Knowing the Comparable differences will have a major impact on your Business profitability.
Tax Planning Vs Tax Management
Tax Planning is all about planning of taxable income and planning of investments of the Tax Payer. As against, Tax Management deals with the proper maintenance of financial records, audit of accounts, timely filing of the return, payment of taxes and appearing before the appellate authority, whenever required. Some of the major comparisons includes:
- The objective of tax planning is to reduce the tax liability to the minimum.
- Tax planning is futuristic in its approach.
- Tax planning is very wide in its coverage and includes tax management.
- The benefits arising from tax planning are substantial particularly in the long run.
- The objective of Tax Management is to comply with the provisions of law.
- Tax Management relates to past (i.e. assessments proceedings, rectification, revisions, appeals etc.), present (filing of return of income on time based on updated records) and future (corrective action).
- Tax Management has a limited scope, i.e., it deals with specific activities such as filing of returns of income on time, drafting appeals, deductions of tax at source on tome, updating records from time to time, etc.
- As a result of effective tax Management, penalty, penal interest, prosecution, etc can be avoided.
Objectively Assessing And Actively Managing Your Tax Risk
Tax law is complex and filing tax returns is a major source of worry whether it is for individuals or big organizations. Tax planning deals with the arrangement of a taxpayer’s affairs in such a manner that it complies with the tax laws and regulations in place. The Scope team will work in partnership with you to minimise your tax and help achieve your key objectives.
The most common mistake that people usually make is to think that tax planning is optimised when every opportunity to reduce taxes have been taken.
Common tax planning techniques that can be deployed usually defer the derivation of assessable income and apply techniques to bring forward deductions. It is however important to realise that consideration may also need to be given to the general and any relevant specific anti-avoidance measures contained in tax law.
Some of the opportunities to reduce tax rely on strained interpretations of the law and this could jeopardise your business and land you in trouble! Hence, tax planning isn’t just about reducing tax; it is also about interpreting the law and finding the optimal solution to your problem.
Scope Business Advisors will assess your situation objectively and actively manage your tax risks.
Business tax returns involve a different assessment and the groundwork involved is a lot more extensive as compared to individual tax returns. We address every need of our clients with the same amount of care and importance whatever be the size of their business.