A company’s surplus cash is money that exceeds what’s needed for short to medium-term expenses. Many businesses keep surplus ‘rainy day’ cash in a bank account for emergencies. But with today’s low-interest rates and rising inflation, keeping money in the bank comes at a price. And as inflation climbs even higher and bank interest rates remain very low, the spending power of cash kept in the bank falls further and further. For this reason, many businesses seek to preserve the value of their surplus cash by investing it.
Could an Investment Bond be worth considering?
An investment bond with an appropriate underlying fund choice could be an attractive investment opportunity for a company’s surplus cash but it is important to remember that the value of any investment can go down as well as up and an investor might get back less than they put in.
Tax Treatment of a company-owned bond.
How a company is taxed depends on what “size” of a company it is. Micro-entities can use historic costs accounting for insurance bonds.
A company will be considered a Micro-entity if it has any of the two of the following:
- A turnover of less than 632,000
- £316,000 or less on the balance sheet
- 10 employees of less
Historic Cost Accounting – Example (year-end 31st March)
Company Investment £200,000 September 2020, Corporation Tax Rates – Assumed 19%.
|31st March 2021||Value £210,000|
|31st March 2022||Value, April 2022 withdraw cash from bond £230,000|
|Period to 31st March 2021 – historic cost £200,000.||No Tax|
|Period to 31st March 2022 – historic cost £200,000.||No Tax|
April 2022 cashing bond £30,000 gain. Grossed up (as underlying fund has effectively been taxed at 20% whilst in the bond): £30,000 x 100/80 = £7125
£7125 available for current year offset. As the tax has already been paid on the bond, a basic rate credit is applied which is offset against the corporation tax liability and therefore no further tax is due.
Things to consider for Corporate investments.
- Is there surplus cash to invest?
- Are low interest rates a concern?
- Would the possibility of keeping pace with inflation be attractive but returns are not guaranteed
- What accounting method is used and what impact does it have on the tax position?