Corporation tax is a key consideration for any business operating in the UK. Understanding how to legally reduce your corporation tax liability is crucial not just for financial compliance, but also for improving your business’s profitability.
In this guide, we’ll walk you through various strategies and considerations to help minimise your corporation tax both legally and effectively.
What is Corporation Tax?
Corporation tax is charged on the profits of all corporate entities in the UK, including profits from trading, investments, and capital gains. It applies to limited companies, foreign companies with a UK office, and co-operatives.
Current Corporation Tax Rates
The current rates for Corporation Tax for 2024 are as follows:
| Small profits rate (companies with profits under £50,000) | 19% |
| Main rate (companies with profits over £250,000) | 25% |
| Main rate (all profits except ring fence profits) | – |
| Marginal Relief lower limit | £50,000 |
| Marginal Relief upper limit | £250,000 |
| Standard fraction | 3/200 |
| Special rate for unit trusts and open-ended, investment companies | 20% |
Legal Strategies to Reduce Corporation Tax
Maximising Allowable Deductions
One effective way to reduce your corporation tax is by maximising your allowable deductions. These include a wide range of business expenses that can be deducted from your company’s profit before tax is calculated.
Common deductible expenses include employee salaries, office costs, business travel expenses, marketing and advertising expenses, and legal and financial costs. It’s important to keep accurate and detailed records of all expenditures as proof in case of tax audits. Ensuring that all legitimate business expenses are accounted for can significantly lower your taxable profits.
Using Capital Allowances
Capital allowances are another potent tool for reducing corporation tax. These allow your business to write off the costs of capital assets, such as equipment, machinery, and business vehicles, against taxable income.
The Annual Investment Allowance (AIA), for instance, lets you deduct the full value of an item within the tax year of purchase, up to a certain limit. This can lead to substantial tax reductions, especially for businesses that require significant investment in capital goods. Understanding and applying these allowances can drastically reduce the amount of tax your business pays each year.
Corporation Tax Reliefs and How to Use Them
Research and Development (R&D) Relief
Businesses that engage in qualifying research and development activities can benefit from R&D tax reliefs, which can significantly reduce corporation tax bills. This relief allows companies to deduct up to 130% of qualifying costs from their yearly profit, in addition to the normal 100% deduction, making a total deduction of 230%.
Qualifying costs include employee costs, materials, utilities, and software used for R&D purposes. This relief is designed to encourage innovation and growth within the UK economy by helping to ease the financial burden of developing new products, processes, or services.
Creative Industry Tax Reliefs
For businesses in the creative industries, specific tax reliefs can apply that help reduce corporation tax. These reliefs are available for a range of sectors including film production, animation, high-end television, and video game development.
For example, the Film Tax Relief (FTR) allows eligible companies to claim a payable cash rebate of up to 25% of UK qualifying production expenditures. It’s essential for businesses within these sectors to understand the criteria for these reliefs to ensure they can benefit from any applicable deductions.
Relief on Charitable Donations
Charitable donations made by companies can also provide a reduction in corporation tax. Donations must be made to registered charities to qualify, and they can be in the form of money, equipment, or trading stock. The value of these donations can be deducted from total profits before tax, helping to lower your corporation tax bill.
This not only supports good causes but also aligns your business practices with corporate social responsibility goals.
Advanced Tax Planning Strategies
Group Relief for Losses
Group relief for losses is a valuable tax strategy for businesses that operate multiple companies within a corporate group structure. This approach allows profits from one company to be offset by losses in another, effectively reducing the overall corporation tax liability of the group.
To qualify for group relief, the companies involved must be part of the same group for accounting purposes, which generally means one company must hold a majority of the voting rights in the other, or a third party must control both. Using group relief can significantly improve cash flow and financial efficiency across your corporate group.
Disincorporation Relief
Disincorporation relief can provide tax advantages for small businesses considering transitioning from a corporation to a sole trader or partnership structure. This relief was designed to help small business owners avoid potential tax charges on the transfer of assets when disincorporating.
It applies to businesses with total qualifying assets of £100,000 or less. The relief allows the business to transfer certain assets without triggering a corporation tax charge, which can be beneficial in scenarios where the simpler structure of a sole proprietorship or partnership might suit the business needs better, especially as they scale down or alter their operations.
Practical Tips on Corporation Tax Reduction
Timing of Expenditure
Strategic timing of expenditures can play a critical role in managing your corporation tax bill. By timing the purchase of significant assets or incurring substantial expenses close to the end of your financial year, you can reduce your taxable profit for that year.
This strategy requires careful planning to ensure that it aligns with your business’s cash flow and operational needs, but when executed correctly, it can provide immediate relief to your tax liabilities.
Paying Dividends vs. Salaries
Deciding between paying dividends and salaries involves significant tax implications and should be considered as part of your overall tax strategy. Salaries and bonuses are deductible business expenses that can reduce your corporation tax, but they also attract National Insurance contributions.
Dividends, on the other hand, do not reduce corporation tax as they are paid out of after-tax profits but are taxed at a lower rate on the individual’s tax return compared to salary. The choice between the two depends on a variety of factors including the business’s profitability, the individual’s tax bracket, and other personal circumstances of the shareholders. It’s advisable to consult with a tax professional to determine the most tax-efficient method for distributing profits within your business.
Ways to Reduce Corporation Tax Legally
Transfer Pricing and Tax Efficiency
Transfer pricing refers to the rules and methods for pricing transactions between enterprises under common ownership or control. Proper management of transfer pricing is crucial for multinational corporations as it affects where profits are taxed.
By adhering to legal frameworks such as the OECD Guidelines, businesses can align their operational practices with tax efficiency. This involves setting inter-company transaction prices at arm’s length to ensure that profits are reported fairly in jurisdictions with different tax rates, thus legally minimising the overall tax burden.
Structuring the Business for Tax Efficiency
The way a business is legally structured can significantly influence its tax obligations. Different structures, such as sole proprietorships, partnerships, limited liability companies, and corporations, come with varying tax implications.
For example, operating as a limited company in the UK generally offers a lower corporation tax rate compared to the income tax rates that might apply to sole traders. Strategic use of holding companies and the selection of domicile for different parts of the business can also lead to substantial tax savings.
Efficient Tax Planning with Ryans
Corporation tax represents a substantial part of your trading costs. Making sure you’re compliant can hold a heavy burden, especially with the increase in reporting obligations, robust investigation policies from the tax authorities and harsher penalties for non-compliance.
That’s why we offer a range of services to help you minimise your corporate tax exposure and relieve you of the administrative burden of complying with tax legislation. These include:
- Determining the most tax effective structure for your business
- Taking full advantage of tax opportunities and reliefs
- Achieving the optimum capital or revenue tax treatment
- Reducing tax on disposals and maximising relief on acquisitions
- Making the most of tax opportunities specific to your industry
- Meeting the rigorous demands of compliance including corporation tax self assessment
- Acting on your behalf in discussions with the tax authorities
Get in touch with our team of experts today to discuss how we can help you minimise your tax.
Reducing Tax FAQs
What are the consequences of illegal tax avoidance?
Illegal tax avoidance, often referred to as tax evasion, involves breaking the law to avoid paying taxes, such as underreporting income or inflating deductions. The consequences can be severe, including hefty fines, criminal charges, and imprisonment, along with damage to the business’s reputation. It’s crucial for businesses to distinguish between legal tax avoidance strategies and illegal actions.
Can small businesses benefit from the same tax reductions as larger corporations?
Yes, small businesses can access many of the same tax reduction strategies as larger corporations, such as capital allowances, R&D tax credits, and other specific reliefs. However, the scale and impact of these strategies may vary. Small businesses often benefit from additional reliefs designed specifically to support their growth and sustainability.
How often do corporation tax rates change?
Corporation tax rates can change depending on the government’s fiscal policy. Changes are usually announced during the annual Budget statement. Businesses should stay informed about these changes through updates from the HM Revenue and Customs (HMRC) or tax advisors to manage their tax planning effectively.
Are tax reduction strategies considered ethical?
While tax reduction strategies are legal and common practice, the ethics can vary by perspective. Strategies that comply with the law and are used responsibly to minimise tax liabilities are generally considered ethical.
However, aggressive tax planning that stretches the bounds of legal tax avoidance may be viewed negatively by the public and stakeholders. Transparency and compliance are key to maintaining an ethical approach to tax planning.
How can startups reduce their corporation tax in the first year?
Startups can reduce their corporation tax by taking advantage of startup-specific tax reliefs, such as the Seed Enterprise Investment Scheme (SEIS) or employing R&D tax credits if applicable.
Additionally, careful timing of significant expenses and understanding how to utilise losses effectively can also help reduce the initial tax burden.