9 (Legal) Ways to Reduce Your Corporation Tax bill
The UK has some of the most complex corporation tax regulations in the world. While it is true that there are some effective methods for reducing your corporation tax liability legally, it can also be challenging to understand exactly what those methods are and how best to apply them.
This blog post aims to provide an overview of 9 legal strategies that UK businesses can implement in order to reduce their corporate taxes.
Each strategy discussed will include information on how it works as well as examples of when and how best to use it. Furthermore, we'll also provide advice on how to assess whether these strategies will actually help you save money in the long run or not.
Finally, we'll take a look at some of the other options available for UK businesses seeking to reduce their tax liabilities and provide guidance on which ones might be most suitable for your particular situation.
By following this guide, you'll get a better understanding of the various ways you can legally lower your corporate tax liability while still remaining within the law.
1. Capital Allowances:
UK companies can use Capital Allowances to reduce their Corporation Tax significantly. This tax relief is available from the first day of purchase, and the cost of the asset can be deducted from the company’s taxable income over a number of years.
Businesses have flexibility in choosing between writing off the cost of the asset gradually or claiming an immediate one-off allowance for capital investments right away. The amount will depend on the type of asset purchased—for example, fixtures and fittings have lower rates than machinery or equipment used in business operations.
Companies also have other options such as Enhanced Capital Allowances which allow 100% upfront tax relief if they purchase energy efficient items that meet certain criteria set by HMRC. Additionally, businesses can claim Entrepreneurs’ Relief when they dispose of an asset, allowing them to pay a reduced rate of 10% on any profits made from selling it. Overall, this is a great way for companies to reduce their Corporation Tax liability and make their finances more manageable.
See the Gov.uk website for more detailed information on Capital Allowances: https://www.gov.uk/topic/business-tax/capital-allowances
2. Research & Development (R&D) Tax Relief:
R&D Tax Credits enable companies to claim tax relief on projects that are deemed to be innovative and improve existing products, processes or services.
The scheme was launched back in the early 2000s as a way of rewarding innovation and the development of cutting-edge technology in science and technology industries.
It’s a massive (and very valuable) incentive in that it provides a substantial tax rebate on eligible R&D costs. The credit in fact covers up to 33.35% of a company’s R&D spend, which is recovered either as a reduction in Corporation Tax or a cash repayment.
Any UK company may be eligible for R&D Tax Credits, regardless of size, industry or profitability. As long as it’s registered for UK Corporation Tax, and qualifying research and development activities have occurred, then a claim is likely.
For more information on R&D tax credits visit our dedicated R&D tax credits page.
3. Structural Changes:
UK companies can take advantage of structural changes to legally reduce their Corporation Tax. By merging two or more companies under the same legal entity, they can benefit from lower tax rates and a wider range of profitable deductions.
Furthermore, some businesses may be able to qualify for certain tax reliefs which could help reduce their rate of Corporation Tax without sacrificing flexibility or profitability. In addition, companies can also save money by transferring assets and staff between different entities in a way that does not trigger any Corporation Tax liability.
For example, transferring physical assets such as property or machinery could help a company cut costs while still remaining compliant with UK taxation laws.
Finally, larger organisations can take advantage of group relief rules which allow them to offset losses between different entities and reduce their overall Corporation Tax burden. With careful planning and strategic use of structural changes, UK companies can achieve significant savings on their Corporation Tax payments each year.
4. Transfer Pricing:
UK companies can use Transfer Pricing to legally reduce their Corporation Tax. This involves pricing transactions between subsidiaries or related parties in different countries, in order to shift profits from higher tax jurisdictions to lower tax jurisdictions.
The best way to do this is by ensuring that the transfer prices used are at arm’s length and that they reflect the reality of market conditions. Companies should also consider measuring performance against benchmarks, obtain independent valuations of intangible assets, and ensure that their TP policies meet the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.
Additionally, UK companies should be aware of HMRC's Transfer Pricing Adjustment rules, which set out how profits are taxed when a company has split its activities between different countries. These rules cover topics such as transfer pricing audits, disclosure requirements, penalties and dispute resolution services.
Finally, having robust governance procedures in place will also help ensure compliance with all relevant laws and regulations regarding transfer pricing in the UK.
5. Investing in Enterprise Investment Schemes (EIS):
UK companies can use investing in Enterprise Investment Schemes (EIS) to legally reduce their Corporation Tax liabilities and improve their overall financial performance. Through this scheme, companies are able to defer their taxes for up to three years after making the investment and receive income tax relief of up to 30%.
This means that the original amount invested can be reduced by up to 30%, reducing the overall Corporation Tax liabilities. In addition, any profits made from selling EIS shares are free from capital gains tax if they have been held for more than three years after the initial investment was made.
This provides a double impact on decreasing a company's Corporation Tax: not only will the initial amount be reduced by up to 30% upon investing, but any money made from selling those investments will also be exempt from taxation.
Furthermore, investing in EIS does not just benefit large businesses; smaller businesses can also take advantage of this scheme in order to increase their finances and reduce their tax liabilities. For example, many small businesses set aside a certain percentage of their annual budget specifically for investment into EIS.
This allows them to make investments into larger projects which can potentially bring greater returns over time and help them increase profits while also minimising their tax liabilities at the same time.
6. Offsetting Losses:
Offsetting losses is an incredibly useful way for UK companies to reduce their corporation tax bill and can be a great way for businesses to recover from any unforeseen losses. The process works by allowing companies to take any losses from previous years and apply them against future profits in order to reduce the amount of corporation tax that they owe.
This is done through multiplying the loss amount by 19%, meaning that for every pound lost, 19p can be deducted from the company’s current corporation tax bill. Companies are allowed to carry forward these losses up to nine years, meaning that if a company fails to utilise their losses in one year they can still benefit in subsequent years.
In order to claim on this provision, businesses must provide evidence of the loss suffered, such as a valid invoice or statement proving the cost incurred. In addition, there are several restrictions surrounding Offsetting Losses, such as only being able to offset against commercial income (not capital gains) and not being able to net off losses against profits within a group of companies.
Nevertheless, Offsetting Losses remains an effective strategy for businesses looking to reduce their corporate taxes during difficult times and should not be overlooked by UK SMEs looking for potential tax savings.
7. Utilising Capital Gains Tax Reliefs:
UK companies can utilise Capital Gains Tax Reliefs to legally reduce their Corporation Tax by taking advantage of certain exemptions and allowances. These reliefs are applicable for when a company sells assets such as shares or property within predetermined timeframes, and can significantly reduce their tax liabilities.
For example, Business Asset Disposal Relief (previously known as Entrepreneurs’ Relief) can allow up to £10m of chargeable gains arising from the sale of certain business assets to be taxed at only 10%, while the annual exempt amount can protect up to £12,300 in chargeable gains from taxation in any given tax year. Companies may also be able to use the Gift Hold Over Relief, which allows them to defer CGT by transferring their taxable asset into another person’s ownership, with any gain that would have arisen being held over until that asset is eventually sold.
In addition, there are other more complex reliefs available such as Seed Enterprise Investment Scheme Relief which further mitigate a companies CGT burden.
It is important for companies to take full advantage of these reliefs so as not to incur higher corporation tax costs than necessary on sales of qualifying assets or transfers of ownership.
8. Invoicing Expenses Separately:
Through this strategy, companies can invoice their overhead costs separately from sales revenue so that the expenses are not included within taxable income calculations.
This enables them to reduce their taxable profit margin significantly, while still maintaining sufficient cash flow levels. Furthermore, such invoicing is exempt from Value Added Tax (VAT) due to its nature as an overhead cost and not part of a sale.
To make the most out of this strategy, companies must ensure that all overhead costs are invoiced separately and that they comply with HMRC’s rules regarding deductible expenses for tax reduction purposes. Companies should also make sure to keep accurate records and documents pertaining to their invoices in case of inspection by HMRC or other entities.
Additionally, it is wise for companies to review their books regularly and make sure that all costs are accounted for accurately to maximise the potential benefits of this method. By taking advantage of invoicing expenses separately, UK businesses can take significant steps towards reducing their Corporation Tax liabilities and increasing profitability.
9. Claiming Overseas Losses & Credits
One of the most effective ways UK companies can legally reduce their Corporation Tax is by claiming overseas losses and credits. This can help offset any foreign exchange rate losses, tax liabilities, or other costs incurred through international operations.
For example, if a company operates in multiple countries, it may be able to claim a foreign tax credit for taxes paid on profits earned in those countries. This would reduce the amount of Corporation Tax due in the UK.
Additionally, if a company has incurred losses in an overseas jurisdiction due to currency fluctuations or other factors beyond its control, these losses can also be claimed as deductions against its taxable income in the UK.
This means that instead of paying Corporation Tax on the full amount of income generated from overseas operations, it will only pay tax on the net balance after deducting these losses.
By using claiming overseas losses & credits to legally reduce their Corporation Tax, UK companies are able to benefit from better profit margins and improved cash flow which ultimately leads to greater financial stability and more competitive business results.
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 proven 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...
In conclusion, reducing the burden of Corporation Tax is an important concern for any UK business.
While it may not always be easy to do so, there are several legal strategies that can help you achieve this. From investing in research and development activities and taking advantage of capital allowances to utilising approved investment schemes, there are numerous methods available which could save your business money in the long run.
Of course, getting expert advice on which strategies are right for you should always be your priority, as well as understanding how they will affect your overall tax bill.
Ultimately, by using these 9 legal ways to reduce your Corporation Tax bill, you can ensure that your business has a strong financial future and remains competitive in the UK market.
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