There are plenty of misconceptions around ‘reducing’ corporation tax. Not to be confused with ‘evading’ tax, reducing tax is perfectly legal and even encouraged.
So, how is it done?
When we say “reducing”, we actually mean maximising the tax reliefs and incentives to reduce the corporation tax payable.
Of course, there’s a lot more to it than that. Below we’ve outlined several strategies we regularly advise our clients on and explain how they can be put into action.
How is corporation tax charged?
Before we start, let’s first look at how corporation tax is charged.
Companies pay corporation tax on profits from all sources of income. This includes their trading profits, investments and chargeable gains (for example, disposing of assets for more than they cost).
The current rate for corporation tax from 1 April 2019 to 31 March 2020 is 19 per cent.
Now we know how corporation tax is charged, we can go about reducing it. Every company has what is known as “allowable expenditure”. Companies can deduct allowable business expenses from their revenue to calculate taxable profits.
Most costs of doing business are defined as “allowable”. Office consumables, renovations, salaries, insurance and energy bills are all allowable, for example.
Yes, pension contributions are allowable expenditure that can reduce the Company’s corporation tax bill.
As this area of tax planning is rather tricky, it’s best to always seek expert advice first.
Employee share schemes
As well as rewarding and motivating workers, companies who offer share schemes may benefit from a reduction in corporation tax.
There are several share schemes available, such as Share Incentive Plans (SIPs), Save As You Earn (SAYE), Company Share Option Plans and Enterprise Management Incentives (EMIs).
Each has its benefits and drawbacks, so it’s best to check with your advisor before going ahead.
Dividends do not reduce corporation tax
Dividends cannot be offset against the Company’s profits. This is because corporation tax is paid before dividends are paid out.
AIA temporary rate
AIA, or the Annual Investment Allowance, is a relief that enables the Company to deduct the full value of fixed asset from your profits for tax.
The item must qualify for AIA, so it’s best to check before making a large purchase. Cars, for example, do not qualify.
The AIA amount has temporarily increased to £1 million between 1 January 2019 and 31 December 2020. To take full advantage of this temporary rate, companies should plan major purchases before 31 December 2020.
Research & Development
There are plenty of examples where tax reduction is incentivised by the Government. One of these is the R&D Tax Credits scheme.
Under this scheme, companies can claim the cost of innovative research projects against tax bill, even if the project is unsuccessful.
Before embarking on any R&D project, consult with us on eligibility.
There are many ways a loss can be turned into a win. For starters, you can offset a trading loss in the current tax year against all of the company’s other taxable income, such as income from investments.
Secondly, you can carry the loss forward or backwards by one tax year, with a carry back generally generating a tax repayment and a loss carried forward reducing a future corporation tax bill.
If there are multiple companies in a group with the holding company having at least a 75 per cent stake in the others, a loss can also be shared with profitable companies in the same group reducing their tax bill.