How to Reduce Corporation Tax Bill – Top 7 tips
“It’s okay to have huge tax bills”- said no one ever. Business owners often frantically try finding answers to their ultimate enquiries: how to reduce the corporation tax bill? In this haste of finding out ways to reduce the tax bills we sometimes make mistakes and end up paying higher taxes instead of claiming wrong expenses or knowingly-unknowingly opt for illegal ways of reducing tax. In this article, we will elaborate on ways and means to optimise the tax payments.
1. Claim business expenses
The more you delay keeping a record of petty expenses the company incurs the more they`ll pile up to huge figures in a matter of years. Thus leaving you bereft of great benefits you were actually eligible to, but ignored considering them to be meagre.
There isn’t any exhaustive list of allowable business expenses laid down. What may be a valid business expense for one may not be the same for others. So while claiming expenses just remember the Golden Rule- that every expense “wholly and exclusively” for business purpose can be claimed. This will ensure that you might not miss out on claiming any major expenses.
2. Annual Investment allowance
Got a major expenditure planned? Contemplating to buy a new plant and machinery for business? Don’t give it a second thought. Go buy them now! This would help you avail annual investment allowance. This allowance allows the assessee to deduct the full value of the item that qualifies for annual investment allowance up to £1 million from profit before tax.
3. Claim various reliefs (R&D, patent box, creative field)
- Research and Development: There are several reliefs provided by law that can help you reduce big figures out of your profits. One such relief is research and development allowance. If the company is engaged in any innovative project, seeking to research or develop an advance in any field then it can claim the expenditure on the same as a relief which is available even if the project is unsuccessful.
It allows 100% deduction of the full expenditure incurred on research and development. But it`s not the best part; the relief also allows you to further deduct an extra 130% of qualifying costs from yearly profits. If the company is loss-making then it can claim a tax credit at 14.5% of the surrenderable loss. To know more about research and development tax relief click here.
- Patent box relief: If the company earns a profit by using patents then it is eligible to patent box relief. This relief enables the company to pay corporation tax at the rate as low as 10%. Yeah! That’s true.
- Creative field: Eight creative industries like film, theatre, video game etc. have been allowed with creative industry tax relief. This relief allows companies to magnify the expenditures and then claim or for loss-making companies to surrender their losses and convert some or all of them into payable tax relief.
Know more about COVID-19 business reliefs
4. Pay your tax early and let HMRC pay you interest
Early to bed, early to rise, makes a man healthy, wealthy and wise!
You could pay your taxes in advance and earn some ‘credit interest’ from HMRC. That`s right. HMRC pays interest at the rate of 0.5% on paying corporation tax early.
The period of interest commences from the date you pay your corporation tax until the payment deadline. The HMRC will pay interest earliest from six months and 13 days after the start of the accounting period. There are several other benefits of early filing click here to find out more about them.
5. Eat, drink and be merry
Achieved your targets? Or just bagged a big project? Or maybe just the time for annual dinner yet? The company is eligible to claim up to £150 per guest on the amount spent by it in arranging for an annual event, hopefully after social distancing rules ease down and we can get back to our offices. This expenditure of arranging for annual dinners, Christmas parties etc. is deductible for company and tax-free for employees. Doesn’t it sound like a bonanza offer? You get to the party and have ample tax benefits too. Sounds fun! Time to put on your party hats (on Zoom-get together, currently :D) And hey, beware of those tax implications of Corporate gifting too."
6. Pay the director an optimum level of salary and dividend
The director can fetch money from the company mainly in the form of salary and dividend. The drawings shall be a tax-effective combination of dividend and salary. This can be worked out with the accountant and drawn accordingly.
7. Hire a good accountant
The last point drives us to the importance to have a good accountant to help you out in making tax-efficient decisions. Accountant’s knowledge and experience can help you bring down your efforts for preparation and filing of your corporation tax returns. Choosing the right accountant isn’t an easy task either but you can take help of our blog on choosing the right accountant to make things easier for you.
There is no magic wand to lower your taxes. All it takes is a properly recorded data, rightly managed accounts and some knowledge about tax benefits and reliefs. We’ve served thousands of clients and helped to cut down their taxes wherever possible. You could also reach out to us. We are happy to help you too. Stay at home, stay safe, switch for digital business and survive the uncertainties of Covid-19.
For further reading: Tax Saving Tips for 2020