10 (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 and provide a more accurate picture of the company’s profits.
For example, if a business paid £5,000 for a new piece of equipment but forgot to claim the capital allowance it’s entitled to, then the profits are actually overstated by £5,000. This means the organisation will end up having to pay an additional £1,000 in Corporation Tax that it didn’t need to - an expensive oversight to say the least!
Although every business set-up is different, there are a few basic tips that all business owners should bear in mind to avoid paying more than they need to.
Corporation Tax Tip #1: Don’t forget to pay yourself
When you’re running a limited company on your own it’s easy to forget that your company is a legal entity that exists separately from you: the money your company has isn’t yours! So, make sure you pay yourself a regular salary.
Salaries count as a business expense that 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 demonstrate that profits are available before dividends are issued. If not, HMRC could well decide to reclassify those dividends as salary, meaning an increase in payable National Insurance Contributions and Income Tax.
Corporation Tax Tip #2: Make sure you claim all your expenses
Ok, so it’s a pain having to record every £3 pack of pens or £5 train ticket. But, over the course of a year, these costs really do add up and should therefore be claimed as expenses.
Remember too that some expense 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 another one. A good place to start is with HMRC’s “wholly and exclusively” rule, which states that anything a company claims must be for business use.
Don’t overlook professional insurance contributions. Because you pay for it through the company, don’t forget to claim it as an expense!
Corporation Tax 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. Essentially, it’s a way for businesses to write-off investments in “Plant and Machinery” (things like big pieces of office equipment, vans, machinery and building fixtures) for tax purposes. This is due to a temporary increase to £1 million until 1 January 2022.
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 profits down to £400,000, meaning you’d only then need to pay Corporation Tax on £400,000.
Corporation Tax Tip #4: Claim your work from home allowance
With the world moving towards a more flexible approach to working, it’s the perfect time to take advantage of the work from home allowance scheme. If any of your employees work from home, HMRC will allow you to claim a portion of their at-home expenses, to meet the additional costs of heating and lighting their work area. Any equipment, services or supplies you provide your remote employees and any household expenses, such as internet access, gas, or electricity charges that they have to pay, can be claimed.
Corporation Tax Tip #5: Claim Patent Box tax relief
If you have a patented invention, you might be eligible for Patent Box tax relief which will allow you to pay a reduced Corporate Tax rate of 10% on the profits you make from your patented product.
Corporation Tax Tip #6: Don’t forget about pension contributions
One of the easiest ways to reduce your Corporation Tax bill is to use the company profits to pay into your employee’s pension schemes. To get this relief, payments must be made before the end of the accounting period.
Corporation Tax Tip #7: Hold a staff party
Need an excuse to throw a party? The costs for organising something like an annual Christmas or Summer party can be tax-deductible. You can claim anywhere up to £150 per head. What better way to reward your staff while giving yourself a tax break!
Corporation Tax Tip #8: Investigate creative industries tax relief schemes
If you’re in the creative industry, there are eight tax reliefs that you can utilise to get a reduced Corporation Tax bill. These are:
- Film Tax Relief
- Animation Tax Relief
- High-end Television Tax Relief
- Video Games Tax Relief
- Children's Television Tax Relief
- Theatre Tax Relief
- Orchestra Tax Relief
- Museums and Galleries Exhibition Tax Relief
To qualify for these creative industry tax relief incentives, you must produce a qualifying film, TV programme, animation, video game, theatrical production, orchestral concert or exhibition.
So, for instance, if you develop video games, you could be eligible for Video Games Tax Relief (VGTR) which could provide you with a deduction against your taxable profits.
Corporation Tax Tip #9: Claim R&D Tax Credits
Worked on a project that took innovative steps to tackle a technical or scientific uncertainty? Maybe you created a new product, process, or service, or you enhanced an existing one? Well R&D Tax Credits can help with the costs involved. It works by either offering a reduction in a company’s Corporation Tax, or as a lump sum cash pay-out.
R&D can take place in any sector from chemical engineering and food production to marketing and 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 R&D expenses can be claimed for?
Any money spent on the following expenses 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. These would include 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 around £57,228.
Corporation Tax Tip #10: Don’t miss deadlines
Companies normally have two years from the end of an accounting period to claim certain tax reliefs, such as R&D tax reliefs, capital allowances and patent box relief. Companies should look to make sure they have claimed their full entitlement to these reliefs before it is too late
Help with claiming R&D tax credits
Tax Cloud is a cutting-edge, self-service online portal designed to take the pain out of claiming R&D tax relief. Tax Cloud allows you to add your own figures and claim your entitled R&D tax relief yourself while being fully supported throughout the claims process by the expert R&D tax team at Myriad Associates.
Tax Cloud are specialists in all aspects of R&D tax relief assistance for UK companies. Developed by the R&D tax team at Myriad Associates, we are made up of skilled accountants and R&D tax experts. With a 100% success track record in making successful R&D Tax Credit claims, you can rest assured you won’t miss out.
If you’re interested in finding out more about the R&D tax credit scheme and how to apply, visit this R&D Tax Credits page. Think you may be eligible for R&D tax credits? Contact us today on 0207 118 6045 or use our contact page.
You’ll be surprised at what you can claim...
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