Top ten techniques to reduce your Corporation Tax bill

| July 5, 2013

If you are running a company, the chances are you will be constantly juggling your corporate finances to make sure you factor everything into your calculations.

Balancing expenditure against income, overheads against savings, every penny counts towards reaching the final figure which you can safely say is your net profit.

One of the biggest demands on your earnings comes from the taxman in the form of Corporation Tax, a levy which gobbles up a fifth of your income. Ouch. But fear not, although you may not be able to escape it entirely it is possible to reduce your exposure to Corporation Tax; in this article we show you how.

1) Reduce your profits

As a company, striving for lower profits isn’t normally top of the wish list but when it comes to limiting the amount of tax you have to pay, it’s vital. Of course that doesn’t mean being less successful or doing less business, but rather restructuring your finances to make sure you maximise tax deductible expenses.

Saving money

Saving money?

Saving money on corporation tax could benefit your business massively.

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For example, you might find that providing a company car is more effective than buying one personally. This would allow the cost to be offset through taxation. If you don’t know the ins and outs of tax deductible expenses you will need to get advice from your accountant before proceeding as using unlawful expenses will just land you with a bigger bill in the long run.

2) Use barren years to your advantage

Many businesses sometimes experience years when things just did not go well. Perhaps it was a temporary downturn in the market, internal problems or maybe even a much-increased level of expenditure. Whatever the cause, it’s not unusual to notch up a year or two of heavy losses in a company’s history.

Rather than pushing these years under the carpet, you could use their financial woes to your advantage. In some cases it is possible to offset previous losses against current or future gains. This can significantly reduce the tax payable.

3) Invest in your future

If you are considering buying new equipment for your business, you could use your investment to help reduce your Corporation Tax bill.

From April 2012, the law allows an 18% capital allowance rate for businesses which relates to all kinds of essential equipment, for example computers, machinery, tools, furniture and so on.

4) Time your purchases well

Having decided to use some of the profit in the business to invest in equipment, timing the purchase could help you to reduce your Corporation Tax. By making sure that the transaction takes place before the end of the year you will ensure you get the tax relief 12 months sooner than if you wait until the beginning of the next tax year.

5) Act like a multi-national billionaire

Some of the large multi-million pounds organisations such as Starbucks and Google have hit the headlines recently because of the ways in which they managed to reduce their tax bill. The chances are that your business is just the tiniest fraction of a size in comparison but you could still take on board some of their practices.

Having an overseas division which ‘sells’ parts or products to the UK operation means the profit is lowered automatically, thus reducing Corporation Tax. It is possible to charge more or less what you want for the services, as long as it looks reasonable from a market perspective.

6) Make the most of research and development

Although many people resent paying their taxes, very few manage to take advantage of all of the tax efficiencies which are on offer. And this has never been more true than when it comes to Research and Development tax relief available on Corporation Tax.

The application is fairly complex so the help of an accountant to get you through the process is advisable. But in a nutshell, if you have any research or development which you have completed in the last two years, or have some pencilled in for the future, if the work qualifies you could be entitled to up to 225% tax relief. Many businesses assume they would not be eligible but the qualifying criteria is much more generous that people realise. This is a subject certainly worth discussing with your accountant!

7) Take care of the future

Setting up a personal pension is a vital part of retirement planning so what better way to protect your future than by reducing the Corporation Tax burden at the same time?

A company pension scheme is a tax deductible expense, effectively allowing you to reduce your net profit whilst at the same time creating an asset which is exempt from tax. Win-win!

8) Work your intellectual property

If your company sells or licences either services or products which are patented, to which you hold the patent, you could slice a further 10% off your Corporation Tax.

The Patent Box scheme permits 10% to be taken off your Corporation Tax bill for all profits which relate to either the sale or provision of patented good, products or licences. The profits in questions must come directly from the patented goods or licence and must be claimed within two years.

9) Don’t hold unnecessary companies

Make sure that you keep the number of subsidiary and associate companies to a bare minimum. The top band of tax applicable to each company will be split amongst all the subsidiaries in the group, effectively reducing the amount of profit which can be earned before the next rate of tax applies.

10) ?.do you want to reduce it?

This might sound like a crazy question but it may not be cost effective to want to lower your Corporation Tax Bill. Levied at just 20% up to ?300,000 the tax is actually much lower than other types you may have to pay.

Corporation Tax Bill

Corporation Tax Bill

These people wouldn?t like this article!

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For this reason you might want to consider how you structure your business and whether you will end up with more in your pocket if you sacrificed a salary and received more by means of a dividend instead. If you are looking for Corporation tax advice further details of tax services are available here.

Conclusion

There are many different ways in which to lessen the amount of Corporation Tax payable, and all of those listed above are entirely legal and above board. HMRC will expect you to get professional help on such a complex matter from an expert such as an accountant…and they may just be able to come up with some further ideas about how to reduce the chunk of money that you have to hand over to the taxman!

 

Image credits: Tax Credits and Michael Fleshman

Top ten techniques to reduce your Corporation Tax bill

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