5 (Legal) Ways To Reduce Your Corporation Tax bill
Tax reduction is an interesting concept. Although responsible individuals and companies are keen to pay their dues, they also don’t want to have to hand over any more than they need to.
How much Corporation Tax do companies have to pay?
The Corporation Tax rate on company profits for the current tax year stands at 19%, meaning an organisation with £100,000 in annual profit pays £19,000 in Corporation Tax. However, the key to ensuring your company pays no more Corporation Tax than it has to, is to claim every allowable expense and deduction to provide a more accurate picture of the company’s profits. For example, if a business paid £5000 for a new item of equipment but forgot to claim the capital allowance it’s entitled to, then the profits are actually overstated by £5000. This means the organisation will pay an additional £1000 in Corporation Tax that it didn’t need to - an expensive oversight indeed.
Although every business set up is different, there are a few basic tips that business owners should bear in mind to avoid paying more than they need to.
Tip #1: Don’t forget to pay yourself
When you’re running a limited company on your own it’s very easy to forget that your company is a legal entity existing separately to you - the money your company has isn’t yours! So make sure you pay yourself a regular salary.
Salaries count as a business expense which reduces your profit and therefore your Corporation Tax liability. So pay yourself before it’s time to pay tax on your profits.
However, this tip comes with a word of caution. Many company owners pay themselves with a combination of dividends and salary but dividends are taken out of profit. This means you must be able to demonstration that profits are available before dividends are issued. If not, HMRC could well decide to reclassify these dividends as salary, meaning an increase in payable National Insurance Contributions and Income Tax.
Tip #2: Make sure you claim all your expenses
Ok so it might seem like a right pain to have to record every £3 pack of pens or £5 train ticket. But over the course of a year these really do add up and should therefore be claimed as expenses.
Remember too that some expenses claims will be industry-specific and there are no hard-and-fast rules. What could be considered an excessive luxury for one company could be a daily run-of-the-mill essential for a different one. A good place to start is with HMRC’s “wholly and exclusively” rule, that says anything a company claims must be only for business use. A couple of expenses that are easy to overlook are professional insurances and pension contributions. These aren’t paid by you personally but by your company.
Tip #3: Make purchases through your company
If you need something new for your business like a new desk, phone or laptop then avoid the temptation to simply buy them yourself - buy them through the company instead.
Looking to make a bigger purchase like a large piece of equipment or new business premises? It’s worth taking advantage of the Government’s Annual Investment Allowance. It’s essentially a way of businesses writing off investments in “Plant and Machinery” for tax purposes (things like big pieces of office equipment, vans, machinery and building fixtures). This is due to increase temporarily to £1 million until 31st December 2020.
For instance, let’s imagine your company has profits of £1 million (sounds amazing!). But if you spent £600,000 on plant and machinery for the business, the entire amount can be deducted from your profits. This then brings these profits down to £400,000, meaning you’d only then need to pay Corporation Tax on £400,000.
Tip #4: Pay HMRC early so they then owe you interest
Pay your Corporation Tax bill early (it’s possible if you’re on top of your tax affairs) and HMRC will then need to pay you back some interest. It just takes a bit of organisation and a little knowledge of the tax system, making sure everything’s recorded properly.
Tip #5: Claim R&D Tax Credits
Worked on a project recently that made innovative steps in tackling a technical or scientific uncertainty? Maybe you created a new product, process or service, or enhanced an existing one? Well R&D Tax Credits can help with the costs involved. It works by offering either a reduction in a company’s Corporation Tax, or as a lump sum amount.
R&D can take place in any sector from chemical engineering to food production, marketing to agriculture. The amount you can claim depends largely on your Corporation Tax position, company size and whether you made a profit or a loss.
What kinds of expenses can be claimed for?
Any money spent out on the follow can be included when making an application for R&D Tax Credits:
- Staff wages and reimbursed expenses
- Employer’s pension contributions and NICs
- Payments to volunteers for clinical trials
- Certain types of software
- Subcontractors and freelancers
- Consumables and materials that are transformed or used up in the R&D activities. This would be things like power, light and heat
We're not talking about small amounts of money here either. SMEs can claim up to 33 pence for every £1 spent on R&D activities that are eligible. Each year the average claim amount for UK SMEs is nearly £55,000. Larger companies can claim up to 10 pence for every £1 spent on qualifying R&D work. Average UK claims are in the region of £275,000.
Interested? You can find out more about the scheme and how to apply on our R&D Tax Credits page.
Contact us today for support and advice about R&D tax relief
Tax Cloud UK is a cutting-edge, effective online portal designed to take the pain out of claiming R&D tax relief. Developed by the expert R&D tax team at Myriad Associates, there are separate sections for both businesses and accountants where your own figures can be added to easily see what you could claim.
Tax Cloud are specialists in all aspects of R&D tax relief assistance for UK companies. Made up of skilled accountants and tax experts, we have a proven track record in making successful R&D Tax Credit claims so you can rest assured you won’t miss out. If you think you may be eligible, contact us today on 0207 118 6045 or use our contact page. You could well be surprised at what you can claim.
- Submitting R&D tax claims since 2001
- 100% success rate
- Over £100m claimed and counting
- Industry leading specialists
- In-house technical, costing and tax experts
- Member of the Research and Development Consultative (RDCC) committee
Meet some of the team behind Tax Cloud