Limited companies pay corporation tax (CT) on their annual profits. An awareness of all the lawful ways to reduce your tax bill by using the many different types of tax relief available rather than trying to buck the system is the way forward since non-compliance is the fool’s path that frequently ends in calamity.
Seeking the advice of an accountant with expertise in business law and tax will ensure you maximise savings while remaining compliant.
At Cloudco, we always advise taking the compliance path. Here, we offer readers a brief map to tax-deductible business expenses and the most tax-efficient ways to maximise capital allowances. We’d recommend investment in research and development and look at how different employment schemes can attract tax credits and protect your staffing levels at the same time.
Getting professional tax advice to ensure savings in your CT bill while remaining compliant is advised. If your business is currently outside the scope of corporation tax, you might consider incorporating your business to take advantage of the wider range of allowable business expenses and tax-planning opportunities available to limited companies.
How much is corporation tax?
The main corporation tax rate will rise from 19% to 25% from April 2023 for companies with profits over £250,000.
When the main rate of corporation tax does rise to 25% in April 2023, only companies with taxable profits over £250,000 will have to pay the main 25% rate. CT will remain at 19% for companies with profits of £50,000 or below, with the newly introduced small-profits rate (SPR).
Between the two rates, a system of marginal relief will apply. This is calculated as follows:
Say your annual profit is £80,000 in the 2023–24 tax year:
1. Multiply your annual profit by the main 25% rate = £20,000.
2. Subtract your annual profit from the £250,000 threshold = £170,000.
3. Multiply step 2 by the marginal rate multiplier of 3/200 = £2,550.
4. Subtract step 3 from step 1: £20,000 – £2,550 = £17,450.
In this example, corporation tax will be £17,450, representing a tax increase of £2,250. This means that there is a 26.5% CT rate between £50,000 and £250,000.
Compliant ways to reduce CT liability is something every business should be interested in. Paying the least amount of tax possible compliantly, means having a basic long-term and informed strategy.
So, let’s now look at the top five ways to reduce CT within the current system lawfully and compliantly.
Top 5 ways to reduce corporation tax
Below are only five of the many ways to reduce your corporation tax liability compliantly depending on circumstances.
(1) Corporate tax planning
In business, corporate taxes are a large part of your trading costs, hence why tax planning is the framework holding together your structure for business growth. Running and growing a business is hard work, the success and, hopefully, the expansion of your business probably is and should be your priority, but there’s a work-life balance to achieve too.
Corporate tax planning is about having ongoing, long-sighted, and year-round insight into the company’s financial health and well-being. This type of planning should form part of your business plan and act as the lynchpin of your business’s financial strategy and plans for growth.
Hiring a small business tax specialist or accountant is the first step to reaping considerable gains and making savings in corporation tax. An online accountant like Cloudco will, among many other services, be able to advise on business decisions that affect the finances of the business, generate financial statements, reports and forecasts, calculate your tax and do your returns.
It is very unlikely there will be any miscalculation or error or fines for late filing. Wouldn’t you agree that this is money well spent? Plus, accountancy fees are a legitimate business expense that no business can afford to not countenance, since, in addition to the fees paid to your accountant contributing to lowering you CT bill, their expertise will introduce ways to reduce tax compliantly.
An accountant is near-certain to save you money in taxes – identifying all types of tax relief for a start – and will ensure compliance to protect the integrity of your company. Besides, what business owner needs the tiresome and time-consuming task of accounting when their focus should be on managing the business. Hence, we have put corporate tax planning at the top of this list of five ways to reduce your CT!
Managing corporation taxes correctly positions your business for growth. Tax law is complicated, so ideally you will know the rules and the law by rote. While online bookkeeping and accounting software is a fantastically useful tool, it’s not able to tutor the uninformed in all the legal rules around tax, which are tricky, and the constant changes tax law undergoes.
Opportunities for tax savings are as easy to miss as the pitfalls that can land you in trouble. It is easy to misunderstand the rules unless you have some accountancy qualifications and know-how.
All this justifies the efficacy of putting your business’s finances in the expert hands of an accountant like the CloudCo Accountancy Group. We help hundreds of small businesses and owner managed limited companies make advance plans to help them manage their CT efficiently.
Our expert corporate tax planning services include:
- Establishing the most tax-efficient business structure
- Planning corporate tax efficiently according to business circumstances
- Setting up payroll and benefits
- Assistance in VAT planning
- Identifying tax-efficient opportunities and available tax relief
- Optimising on capital or revenue tax.
- Capitalising on acquisitions relief using capital allowances
- Reducing tax liability on disposals
- Assisting with overseas business ventures
- Maximising business tax benefits per your industry
- Compliance with tax return legislation including CT self-assessment
- Interacting and acting on your behalf with HMRC as required
Corporate tax planning is not a short-term fix – it is a long-term strategy. The objective is to achieve maximum gains involving revenue taxes, CT, capital gains tax and inheritance tax.
Work in this area can include VAT, national insurance contributions, and stamp duty as well, but a more common technique of tax planning is to look towards increasing the available cash in the business to use for investment purposes or simply to increase the working capital available to the business.
However, bearing in mind that the timing of business expenditure is so important, one important tip to bear in mind right now as we head towards what will be year-end for some businesses, is to bring forward any proposed expenditures in the current tax year as opposed to waiting until the following year.
Taking all the tax credits your business is eligible for is another seemingly simple strategy, but you’d be surprised how many businesses overlook this vital tax-saving proposal simply because they’d never had an expert identify and explain this gap in their strategy before.
(2) Pension contributions
Tax relief on employer pension contributions is a straightforward way to achieve a deduction from profits, allowing the sums deducted to be a legitimate business expense. Hence, pensions are one of the most efficient ways for businesses to reduce their CT bill (and for employees, one of the best ways to save money for the future tax free).
Companies’ deductions for employee or director pensions must be made via payroll from their total profits before the end of the accounting period. Deductions for pensions are only allowed in the chargeable period in which the contributions are paid. This means that, for an employer pension contribution to show as paid in the chargeable period, it must have been paid – with the money cleared and showing an ‘accounting entry’; the payment cannot be done as an accrued liability.
Much like the way changes to corporation tax rates usually applies from 1 April, some company’s tax year in respect of employer pension contributions mirror the ‘financial year’ that runs for employees: 1 April to 31 March. It is important for employers to consider employee and directors, that is, the individuals’ personal tax position before making pension contributions.
Equally, where large contributions are made by an employer to an employee pension fund the relief is not given based on the chargeable period, but spread over more than one period. There is a process to decide whether spreading the relief like this is required, the Pension Tax Manual will provide further details of the spreading relief detail, but an accountant can advise on this vital area of reducing your CT bill.
(3) Benefit-in-kind
Different benefit-in-kind (BIK) tax rules apply dependent on the type of benefit (company cars, health insurance, travel and entertainment expenses and childcare).
When it comes to vehicles, it depends on the type of vehicle. For example, a company may provide an employee with a vehicle strictly for business use — a lorry, say, or other commercial vehicle, whereby there would be no BIK issue, and this would be entered to the accounts as a capital expense against profits.
There are some vehicles that employees are more likely to use for business and personal use, however. If a vehicle is classed as a van and used privately as well as for business purposes, then a fixed BIK rate will apply for the van and another for the fuel.
Journeys from home to work or work to home do not count as private in this context, so this can be another neat and efficient benefit – providing few or no private miles are done in the vehicle by the employee. The rules are more complex if the vehicle made available to the employee by the company is a car, whereby there will be a BIK for the car, and again for the fuel.
The calculations for cars or vans with dual business/private use are based on the value of the car when it left the factory, its emissions and its fuel type, but not the actual private use. HMRC encourages the purchase of electric cars: a car with emissions of less than 50g of CO2 and a range of over 130 miles can have a taxable benefit as low at 2% of list price (as of April 2020).
Lastly, some cars that companies make available to employees can be entirely exempt as taxable BIK providing they qualify as ‘pool cars’. These are cars which employees share and are indisputably for business use only since typically they remain on the business premises unless they are out on the road for business purposes. See more about the rules for business vehicles below at point 8 of expenses.
(4) Claiming expenses against Corporation Tax
Fundamentally, any expense claimed against the profits of a business should have been incurred ‘wholly and exclusively’ for business purposes. All allowable expenses must be recorded on accounting software or on a spreadsheet or equivalent.
Receipts for business expenses can be stored digitally via an app or the paper receipts can be filed and scans of the original receipts can be stored digitally on a computer. In short, HMRC requires businesses to maintain adequate records and keep receipts and records for at least six years from the year the expense was claimed.
We list the most popular types of allowable expenses below, but make sure that you know the rules attached to each one:
Accommodation expense for business travel
Accommodation and subsistence expenses incurred for business travel to a temporary workplace can be claimed as a valid business expense, including hotel, bed and breakfast and rental property.
There is no fixed limit/allowance for accommodation as such, but the sum claimed should be reasonable. Special rules also apply when employees are provided with residential accommodation by the business, either the actual sum can be claimed or HMRC’s overseas subsistence rates can be used for the country or city travelled to for business purposes.
Accountancy fees
The fees you pay for the accounting services provided to your company will attract tax relief. However, an element of private advice you receive from your accountant relating to personal matters, such as preparation of personal tax returns, is not applicable since the tax relief against the profits of the business should solely relate to the company’s accounting affairs.
If the accounting fee does include a personal element, it must be recorded as a BIK in your company accounts for which the company will be liable to pay 13.8% national insurance contribution on BIK for the tax year 2022/23.
Advertising and marketing
Businesses must advertise and market their products or services for commercial reasons, so it stands to reason that money spent in this area attracts tax relief. Expenses incurred on advertising and marketing (including website development and public relations, publications in print or online, networking) also attract tax relief.
Entertaining clients by, say, taking them out for dinner, unless reasonably required as part of the event/promotion, must be treated as an entertainment expense and thus do not always automatically qualify as a legitimate business expense as per HMRC guidelines.
Bank and overdraft charges
Limited companies can claim tax relief on authorised bank and overdraft charges, that is, on interest payments and charges paid on business loans, and on business bank accounts. Unauthorised bank charges are not allowed as a business expense per HMRC guidelines, e.g. for standing charges levied each quarter.
Business mileage expenses
If an employee of a company uses their own vehicle to travel to a temporary workplace on behalf of the company, the mileage related to business travel can be claimed from the company. The applicable, approved mileage allowance rates (AMAPs) are as set out by HMRC and include other expenses such as service of the vehicle, fuel, insurance and other running costs, including congestion and car-parking charges.
VAT on mileage expenses can also be reclaimed.
Business-related publications and subscriptions
Many businesses subscribe to magazines, trade publications and books for business purposes (for research, reference, training), all of which can be claimed as legitimate business expenses. Daily newspapers are not commonly included as a legitimate business expense although there are exceptions.
Business insurances
Limited company professional indemnity, public liability and employer liability insurances are all legitimate business expenses. There are various business insurance options available to cover the unexpected, whereby you can choose either individual policies or combine them into one, depending on the nature, type and size of your business.
Vehicles used for business; travel expenses
Costs of the purchase or maintenance of any vehicle used by a company for business purposes can be claimed as a valid business expense. Travel expenses, including those made by car or van, can only be claimed if you meet HMRC’s conditions.
Capital allowances on assets and equipment
Capital allowances on assets and equipment used by your business can be claimed as expenses, but they must meet HMRC’s conditions.
The percentage of the capital allowance varies depending upon the type of business expense. However, to encourage business investment, some expenditure qualifies for 100% relief such as spending on environmentally-friendly or energy-saving equipment or low-emission car purchases.
Don’t forget that you can deduct the full value of an item that qualifies for the annual investment allowance (AIA). And remember that capital allowances can also be claimed for the construction of new non-residential buildings and structures where the purpose is for business use or can be apportioned in part for business use.
Charitable donations
Limited companies can claim tax relief, by deducting the donation from the company’s total profits, for donations to charity, but only specific types of donation apply:
- Monetary donations
- Land, property or shares in another company (shares of your own or a close company will not qualify)
- Equipment or trading stock (items manufactured or sold by your company)
- Employee, skills and services (on secondment)
- Sponsorship payment
Childcare costs
A limited company can provide employees or directors with childcare vouchers providing the individuals were registered under the company’s scheme before 4 October 2018 (the scheme closed to new entrants after this date). The childcare voucher scheme has been replaced by the Tax-free Childcare scheme. The cost of providing workplace nurseries for employees can also be claimed as a business expense.
Christmas party & staff events
Many businesses see events such as an annual Christmas party as a celebration and team-building exercise as well as a reward for hard work over the calendar year. In this sense, therefore, limited companies can claim the annual Christmas party as a business expense, but the exemption will only apply providing certain guidance is adhered to.
Clothing
While the cost of everyday clothes for work is not a valid business expense, workwear required in specific roles according to the nature of the business may be including the uniform an individual is expected to wear while at work or protective clothing (e.g. high-vis jacket, protective footwear, hardhat, or anything that increases safety or protects the individual as per the nature of job). This includes the cost of purchase and/or hire and the expense of laundering.
Incorporation and pre-trading expenses
The cost of incorporating the company can be claimed as a valid business expense. This could include certain expenses incurred prior to setting up the company – meeting clients, phone bills or equipment costs.
In cases where these expenses are made within seven years of the business first trading, and providing the costs are reasonable, a claim for expenses related to the setting up of the company can be made.
Entertainment & hospitality expenses
Business entertainment is an allowable business expense; only limited entertainment expenses are allowable, at trade fairs for example, or to entertain a business client from overseas. You should ensure these expenses are paid for by the company and that they relate solely to the business.
Equipment expenses
Expenses incurred for the purchase or maintenance of computer equipment, laptop, hardware, printer, and software can be classed as a valid business expense. In this case ‘equipment’ also includes fixed assets purchased for business purposes such as furniture, chairs etc., all of which can be claimed for tax purposes to attract tax relief.
The equipment purchased should be for business purposes only, and so long the equipment purchased is not specifically intended for personal use, that is, personal use is minimal, it will not be treated as a ‘benefit in kind’.
Eye tests and glasses
Directors and employees who regularly work at a screen – laptop, computer monitor or any kind of display screen – are eligible for having eye tests paid for by the company, which a limited company can claim as an allowable business expense. The cost of glasses can also be claimed where the eye test results in a prescription for glasses to be worn while working at a display screen or monitor.
Food and subsistence when travelling for business
Subsistence expenses are an area of the expenses arena in which the unwary can fall foul. Remember that the meal rates only kick-in when you are away from your office/home for more than five hours (not for a five-minute trip to buy a sandwich).
Usually, food and subsistence expenses are allowable if the travel itself is an allowable expense. Tax relief can be claimed for food or overnight expenses while travelling to a temporary location for work purposes.
Gifts and trivial benefits provided to employees
Businesses can claim tax relief on business gifts and trivial benefits providing they meet basic conditions.
General office purchases
A limited company can claim for small office-related purchases including office stationery, postage and computer accessories. If an employee buys stationery for work purposes from their own purse then the cost for these items can be reimbursed to them by the company.
Home-office or use of home-as-office
If most time is spent working from a home office, the additional costs incurred on energy costs (including gas heating and electricity), broadband, phone and water charges can be charged as a legitimate business expense. However, when the additional costs cannot reasonably be ascertained, then reimbursement of £6 p. w. or £26 p. m. (as of 6 April 2020) can be claimed for using your home as an office. This is not considered a BIK by HMRC, and therefore no tax will be due.
Alternatively, a limited company can rent out a space in your home as an office and charge a market rent for use of the space. The company can claim this as an expense, but the income must be declared as earnings on a self-assessment tax return after expenses. Before renting an office in your home to your limited company, you need to do the following:
- Record the board minutes where the rental was agreed;
- Create a rental agreement between you and your limited company.
- Make sure that the rental of the office space is agreed during specific times of the day.
- Charge a commercial rent for the space.
Hire purchase agreement
A hire purchase agreement is where a buyer purchases a product on finance by putting down an initial payment with the seller, but the legal title remains with the seller until the buyer pays the outstanding amount. Hire purchase agreements can be claimed by a limited company providing the hire purchase agreement is in the company name.
Mobile, telephone, landline and broadband expenses
Tax relief can be claimed for business landline telephone and broadband expenses. The cost of providing each employee with a mobile phone can be claimed as well, but the phone contract must be in the business name.
Medical/health insurance and private health check-up
A private annual health assessment or health screening, when provided to all employees and directors working for the company, is not considered a BIK as per HMRC guidelines, thus this element can be provided tax-free in all respects.
Medical and health insurance can also be classed as valid business expenses and hence the cost can be claimed through the company. This cover must be a specific Permanent Health Insurance (PIH) policy that has been arranged by the company and for which it pays through its bank account. However, since HMRC considers the provision of health insurance a BIK, employees do need to pay personal tax on it while the company is also liable for NIC at 13.8%.
Professional Subscriptions and professional fees
When a business is part of a professional or trade association that benefits its operation, the cost can be claimed against CT. It must be listed as an HMRC approved professional organisation and be directly relevant to the business.
Professional fees are those paid to professionals such as accountants, solicitors, architects, etc. for their services provided specifically to the company. Payments that have been made to a professional, providing they are made specifically in relation to the business and are not capital in nature and directly relate to the trade of the business, can be claimed as an expense.
It is a good idea to keep a note on file to explain your reasoning behind these costs since there are exceptions to this rule.
Pension contributions for employees and directors
The employer pays money into the pension pots of employees and these are called pension payments. For the tax year 2021/22, both individual taxpayers and the company can claim tax relief on annual pension contributions up to £40,000. Costs incurred in providing pension advice to employees are eligible for an exemption of up to £500 per tax year. Pensions attract no BIK liability for employees.
Relocation expenses
Relocation expenses are tax deductible when incurred by an employee who needs to relocate for work. This may be relocation to another postcode, town or county in the UK or abroad for work purposes.
Relevant life insurance
Limited company directors gain valuable tax benefits by paying for life insurance premiums through the company rather than from personal income after tax. Relevant life insurance policies are not open to the director(s) of the company alone, but can also represent a part of a very attractive employee salary package for small businesses, allowing employees both life insurance and a wide-ranging benefits package that not only rewards them but helps them to live life well.
The company itself must set up the policy; the policy will pay out a tax-free lump sum on the death (or diagnosis of a terminal illness) of the person insured, with the proceeds going directly to the employee’s family or financial dependants on death. This is a great CT saving and helps businesses to attract and retain the best people.
Salaries
The salaries paid to employees or directors is considered an allowable business expense. If you are paying employees tax-efficient salaries up to the national insurance threshold limit, NICs will not be payable until the threshold limit is crossed (currently £9,500). It can be more tax efficient to pay employees lower monthly salaries with attractive non-taxable benefits included.
Stationery, postage and printing costs
Stationery and printing costs – e.g. postage, stationery supplies, printing and printer ink – used for business purpose are valid business expenses that can be claimed through the business.
Training expenses
Training is tax exempt, providing it is offered to allow staff to work more effectively. In the case of overseas training, HMRC consider this permissible only when the complete necessity of the training abroad can be proven to relate to a specific necessity to improve performance.
Overseas training will not normally be allowed unless the following can be clearly demonstrated:
- A schedule which gives full details of the training events involved;
- Evidence to show that the nature of the training is fundamental to the duties performed by the worker and that the worker could not undertake their role without the benefit of the overseas training.
Note that if these two criteria are met, travel and accommodation for the duration of the training course can also be claimed, but remember that training expenses can only be claimed as an expense when the training relates directly to updating existing skills rather than acquiring new ones.
(5) Research and Development
Research and development tax relief is designed to benefit companies that undertake projects seeking to advance knowledge or capability in a field of science or technology. The R&D scheme enables businesses to either reduce their CT liability, get a tax refund on previously paid tax, or, if the company is loss-making, possibly receive a tax credit providing the costs incurred on qualifying R&D can be proven.
Whatever the size of the business, if it is creating new products, processes or services or modifying existing ones there is every chance it could be carrying out research and development. R&D can take place in any sector and occurs widely in all sorts of areas from food processing to software development, building construction to healthcare.
There are two types of R&D relief that relate to the size of the business and whether the R&D project has been subcontracted to another company.
How to apply for R&D tax relief
We recommend that businesses should seek expert help from their accountant when applying for R&D tax relief. Alternatively, an application can be made while submitting a CT return by putting and ‘X’ at box 99 (for SMEs) and at the improved expenditure in box 101.
Having notified HMRC, the business must then explain their reasons for a specific R&D activity to qualify for a tax relief. The time range within which a business must apply for relief is two years after the end of the CT accounting period. If a business believes that it qualifies for a R&D tax credit claim, it must be able to show adequate reasoning and records for the project.
Conclusion
Here we have provided many different ideas on how to reduce your CT bill and how to benefit your business with some great incentives for growth and to attract and retain the best staff.
Without any bias or obligation, we have tried to clarify the importance of having a trained professional – an accountant or tax specialist – at your side to help your business run efficiently, compliantly, and effectively.
Compliance with the UK tax system should be your number one priority, for little is possible in terms of pursuing any of these reliefs or tax credits, let alone investment opportunities, unless you have lifted the weight and worry of any hint of non-compliance.
Cloudco gives businesses control by lifting the burden of bookkeeping and accounts. Business growth is what we aim for with our clients by providing Xero software to help you keep your books in good order and then providing our expertise to reinforce your business.
Our objective is not just to reduce your CT tax bill in all lawful ways, but to always be on hand with advice and ideas and with an eye to the future, always looking to how we can help you manage your business tax, finances, and policies and procedures better. Contact us today, for tax advice and accounting support.
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