Paying less tax doesn’t have to be a sensitive subject, because there are some perfectly legal ways to reduce your corporation tax bill.
The UK’s corporate tax has been steadily declining over the last few years. At the moment, the tax rate in the UK is 20% – the lowest in the G7. Which is good news for enterprise! And quite enticing for anyone who wants to set up a business, or move their headquarters to the UK.
In 2016, the government pledged to lower the tax rate down to 17% by 2020. The plan is to set the rate at 19% for the 2018 and 2019 financial years, before it stands on its promise and lower it to 17% at beginning of the next decade.
But even in such business-friendly conditions, there are ways to reduce the tax you pay on your profits. It’s important to pay HMRC what you owe, but why pay more than you have to?
Most small businesses, startups and sole traders pay the ‘Small Profits Rate’, which is 20% (in 2018) and applies to enterprises with annual profits under £300,000. Larger companies which generate more than £300,000 in profit pay the ‘Main Rate’ of 21%.
For example, if you’re small business made an annual profit of £50,000, you’ll have to pay £10,000 in corporation tax. So, the lower the profits, the lower the tax.
Here are the ways you can lower your tax bill before you part with your hard-earned cash:
Claim your business expenses
The most straightforward and quick fix is to be aware of what you can spent money on. “So, what can I claim for?” is one of the most common questions our team gets asked.
Watch Lucy Cohen explaining exactly what business expenses you can claim for:
Generally speaking, the following are broadly allowable:
- office costs, eg stationery or phone bills
- travel costs, eg fuel, parking, train or bus fares
- clothing expenses, eg uniforms
- staff costs, eg salaries or subcontractor costs
- things you buy to sell on, eg stock or raw materials
- financial costs, eg insurance or bank charges
- costs of your business premises, eg heating, lighting, business rates
- advertising or marketing, eg website costs
It’s easy to forget to claim on that £7 taxi fare, or the £10 train ticket, or £3 bus ticket… But throughout the year these expenses can add up.
Also, as a business owner, you can claim on annual staff events, such as Christmas or summer parties, as long as the spend doesn’t exceed £150 (including VAT) per person.
Another example is claiming money spent on food and drinks. The tricky part is that this only works if you’re away from the office or usual place of work. This includes attending business meetings, or events, to name a couple.
Just remember that HMRC’s rule is that anything you claim money on must be entirely for business use.
Make use of the Annual Investment Allowance (AIA)
What does that even mean? Well, it means you can go shopping and splash on new company equipment (eg computers, printers, phones), new premises or other business assets. This also includes expenses related to running your business.
The allowance currently is £200,000, which means you can offset any such spending against your tax bill up to that amount.
For example, if your profits where £50,000 and you spend £30,000 on replacing your employees’ computers, you’d only pay tax on the £20,000 that’s left.
Another example: if you’re a sole trader and you buy a new Macbook which costs £1000 but you also use it outside of the business for about half the time, the amount you can write off via the AIA is reduced by 50%.
Depending on the year, you need to adjust how much you can claim:
Enjoy creative industry tax reliefs
Special tax rules apply to those working in the creative industry. Your company will qualify if it’s liable to corporation tax and is directly involved in the production and development of:
- certain films
- high-end and children’s television programmes
- animation programmes
- video games
- theatrical productions
- orchestral concerts
- museum or gallery exhibitions
To qualify, your company needs to pass a cultural test and acquire a formal certification, certifying that the production is a British film, British programme or British video game. The process is administered by the British Film Institute (BFI) on behalf of the Department for Digital, Culture, Media and Sport (DCMS). Head over to the GOV.UK website to see how the relief is calculated.
Research and Development (R&D) tax reliefs
If your company works on innovative projects in science and technology, seeking to develop and advance in a field, you might be able to claim tax relief on your profits.
HMRC has very specific guidelines as to who qualifies, and in some case, it can be claimed even if a project was not successful.
To quality your company needs to be part of a specific project which works towards advancement in science or technology, but isn’t related to social sciences like economics, or theoretical fields like maths.
If you’re thinking about applying for this, you’ll need to be prepared to explain how your project:
- looked for an advance in science and technology
- had to overcome uncertainty
- tried to overcome this uncertainty
- couldn’t be easily worked out by a professional in the field
You can claim SME R&D relief if you’re a SME with:
- fewer than 500 employees
- a turnover of under €100m
If you’re successful, the R&D relief will help you:
- deduct an extra 130% of your qualifying costs from your yearly profit, as well as the normal 100% deduction, making a total 230% deduction
- claim a tax credit if the company is loss making, worth up to 14.5% of the surrenderable loss
Get taxed less for profits earned from patents and other innovations
The scheme is called ‘Patent Box’ and your company can only benefit from it if earns profits solely from patented inventions. The lower tax rate is 10% and has been in use since 1 April 2013.
The second requirement is that your company must own or exclusively license-in the patents, and must have been involved in their development (subject to qualified development).
There are variety of categories of patents, rules, and regulation set by HMRC, so it’s best to read the HMRC guidelines to learn more.
Pay your tax early and make HMRC pay you interest
Yes, you read this right – HMRC can pay you an interest rate, known as ‘Credit Interest’, for paying your Corporate Tax early.
The current rate is 0.5%, and the earliest HMRC will pay interest from is six months and 13 days after the start of your account period. The interest is accumulated from the date you pay your corporation tax to the payment deadline.
If you get your finances sorted way in advance, you get the chance to have a better overview of how your business is doing and identify any areas of improvement. A downside of paying early is you’ll have less money to re-invest in the business. So, it’s worth planning it a little before paying HMRC in advance.
That’s it! Hopefully next time you won’t miss out on any tax-deductible expenses, and save a bit of cash. Who knows, with the savings you may want to switch to a new accountant?