There are many ways that companies can either improve the efficiency of their tax affairs or provide short term cash flow benefits from managing their tax payments, according to PwC.

“Cash is king and with intense focus on the credit crunch, companies are starting to recognise the benefits of managing tax effectively in the downturn," explained Richard Farnsworth, tax director, PricewaterhouseCoopers LLP.

"In turn, we are starting to see more engagement with clients on areas such as recovering overpayments in relation to quarterly payments of corporation tax and accelerating refunds of tax paid in previous periods if they are now loss making as well as more applications to pay tax later than would normally be the case. We are also seeing more focus on areas where tax costs can be reduced," he added.

PricewaterhouseCoopers provides some examples of how companies can improve their cash flow by managing their tax affairs more effectively:

Corporate tax quarterly payments

Some larger companies are required to make four quarterly corporation tax payments on account each accounting year. In concept, computing the payment is simple: a calculation should be made to estimate the company’s total liability and the subsequent amount of tax payable. However, companies should make payments on the basis of the expected results, rather than on the basis of budgeted figures - which considering the current economic climate could look somewhat over-optimistic by the time quarterly installment payments fall due. Companies must document the reasons for the position taken, particularly where they claim repayments, in order to avoid penalties if the position taken turns out to be unduly favourable. Where payments have already been made but trading then takes an unforeseen downturn, it is possible to obtain a refund of previous quarterly payments without needing to wait either until the end of the year or the next installment date, again this can provide valuable cash flow benefits.

Research and development tax credits

Research and development (R&D) tax credits can generate real cash tax savings. The rules surrounding what constitutes R&D are often thought, in error, to restrict qualifying activities to research and many companies make the mistake of just focusing on the ‘research’ because they don’t realise what activities qualify as ‘development’. A company paying a staff provider for externally provided workers that relate to R&D work may also qualify for the relief. Consumables, general software and some utilities used in relation to R&D may also qualify.

The value of the relief has recently been increased by HMRC for all companies so there is every incentive to make sure all possible claims are made. From 1 August 2008, SME R&D tax relief increased from 150% to 175% while the relief available for large companies increased to 130% from 1 April. It is important to remember that for small or medium sized companies (now defined as those with less than 500 employees) that are loss making it is possible to get a refund of PAYE/national insurance; in the current climate this can be an extremely valuable source of cash for companies. Companies also shouldn’t forget to claim R&D allowances on capital spend, which is becoming more valuable given the phasing out of industrial building allowances and the reduction in capital allowances.

Tax on leased properties

Some may find themselves with surplus leased property or will wish to move to alternative, cheaper property. In such cases, it may be a commercial requirement to make a substantial payment to the landlord on surrender of the original lease if it is not possible to sub-let it. It is important to be aware that this surrender can have a high tax cost as it will normally be taxable for the landlord as a capital sum derived from an asset, but will not be deductible for the tenant. With appropriate advice and structuring such tax costs can often be avoided or reduced.

Empty properties

Owning an empty property could mean potential business rate savings, such as business rate allowances to reflect reduced usage and mitigate empty rate charges. Discretionary rate allowances are negotiable where a property is partly utilised in the short term and the local authority accepts the business case put forward.

Disposal of valuable assets

Planning for a downturn in business will often involve disposals of valuable business assets to raise cash and this may crystallise large chargeable gains. Generating a capital loss to shelter the gains arising is possible, although care must be taken as there have been restrictions on the use of capital losses by legislation in recent years.

Employee share plan deductions

These are easily missed as the legislation (Schedule 23 Finance Act 2003) is still relatively new and can apply to many companies, especially for private companies where options are only exercised on a change in control, and therefore they have not previously been in a position to claim. Entrepreneurs who are thinking of selling a company or business could increase the sale price by looking more closely at their employee plans and/or employee benefit trust shareholdings to make sure this tax benefit is factored in.

Salary supplement arrangements

Salary supplement arrangements can help employers save on employment costs without reducing the number of their employees. They may be used to structure the provision of, for example, pension plans, childcare, mobile phones, accommodation, travel, car parking, staff restaurant/canteens and company cars. Managed well, they can be cost and time effective ways of providing benefits to employees yet still fully compliant from a tax, employment and consumer law perspective.

Reducing workforce

In the current business climate, companies may be thinking about reducing the size of their workforces. This may be caused by an introduction of new technology, a change in business strategy, cost pressures, consolidation or office relocation. Since the last economic slowdown, there have been a number of changes in law which companies must consider. For example, the business rationale that causes redundancies has been brought firmly into the consultation process by recent case law; HM Revenue & Customs’ (HMRC) interpretation of when payments in lieu of notice (PILON) should be made is continuously changing; age discrimination laws affect selection processes and the legality of redundancy payments; and there have been several court challenges to incentive plans under restraint of trade and age discrimination laws.