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Any company doing business in the UK must take corporation tax into account. Gaining knowledge about legally lowering your corporation tax liability is essential for both financial compliance and increasing the profitability of your company. We’ll go through a number of tactics and factors in this blog to assist you how to reduce corporation tax in a way that is both lawful and practical.
What is Corporation Tax?
All corporate companies in the UK are subject to corporation tax on their income, which includes capital gains, trading, and investment profits. It covers cooperatives, limited firms, and international businesses with a UK office.
Legal Techniques for Lowering Corporation Tax
Maximising Allowable Deductions:
By maximising your permitted deductions, you can lower your corporation tax in an efficient manner. These are a wide range of business costs that are tax-deductible before the calculation of taxes on your business’s profits.
As a rule, the following are typical deductible costs, wages paid to workers, office overheads, business travel expenses, expenditure on marketing and advertising, and legal and financial charges. In case of a tax audit being done, it is important to have maintained exacting details of every expense. You can reduce your taxable profits by a significant amount by ensuring that all allowable company expenses are written off.
Use Capital Allowances:
A powerful additional instrument for lowering company tax is the capital allowance. These enable your company to deduct capital asset expenses from taxable income, including those for machinery, equipment, and company cars.
For example, you can deduct the entire cost of an item within the tax year that it was purchased, subject to a cap, using the Annual Investment Allowance (AIA). Significant tax savings may result from this, particularly for companies that must make large capital goods investments. By comprehending and utilising these benefits, you can significantly lower the annual tax burden on your company.
How to Utilise Corporation Tax Reliefs?
Research and Development (R&D) Relief:
Enterprises that participate in eligible research and development endeavours stand to gain from R&D tax exemptions, which have the potential to drastically lower corporate tax obligations. In addition to the standard 100% deduction, this relief permits businesses to deduct up to 130% of qualified costs from their annual profit, for a total deduction of 230%.
Employee expenditures, supplies, utilities, and software utilised for research and development are all considered qualifying costs. This relief is intended to lessen the financial burden of creating new goods, procedures, or services, which will promote innovation and growth within the UK economy.
Creative Industry Tax Relief:
Certain tax breaks that lower corporation tax may be applicable to companies operating in the creative industries. Film, animation, premium television, and video game creation are just a few of the industries that can use these reliefs.
A payable cash rebate of up to 25% of UK qualified production expenditures, for instance, is available to qualifying enterprises under the Film Tax Relief (FTR). To make sure they can take advantage of any relevant deductions, organisations operating in these industries must comprehend the requirements for these reliefs.
Relief on Charitable Donations:
Corporations may also receive a corporation tax reduction for their charitable contributions. To be eligible, donations must be made to organisations that are registered; they may be in the form of cash, machinery, or trading stocks. You can reduce your corporation tax liability by deducting the value of these donations from your total profits before taxes. This not only helps worthy causes but also synchronizes your business operations with the objectives of corporate social responsibility.
Innovative Techniques for Tax Planning:
Group relief for losses:
Businesses that run several firms under a corporate group structure can benefit from group relief for losses as a tax tactic. By using this strategy, the group’s total corporate tax liability can be lowered by offsetting the gains from one business with the losses from another.
The companies in question must be included in the same group for accounting reasons in order to be eligible for group relief. It typically means that one company has to control the greater part of voting rights in the other, or a third party has to control both. Your corporate group’s financial efficiency and cash flow can be greatly enhanced by using group relief.
Disincorporation Relief:
Small firms that are considering the switch from a corporation to a sole trader or partnership structure may find disincorporation relief of some benefit tax-wise. This relief was designed to help small business proprietors not to pay possible taxes over the assets’ transfer during the liquidation process.
Businesses with less than £100,000 in total qualifying assets are eligible to apply. A sole proprietorship or partnership’s more straightforward organizational structure may be more appropriate for a business in certain situations, particularly when it is scaling down or changing its operations. This relief enables the business to transfer specific assets without incurring a corporation tax charge.
Practical Tips on How to Reduce Corporation Tax
Timing of expenditure:
Choosing when to make purchases can be very important for controlling your business tax liability. You can lower your taxable profit for a given year by timing the acquisition of large assets or racking up large bills at the end of the fiscal year.
When properly implemented, this method can immediately reduce your tax payments, but it does involve careful planning to make sure it fits with your company’s cash flow and operational demands.
Paying Dividends vs Salaries:
Choosing to pay salaries or dividends has major tax ramifications and should be taken into account as part of your overall tax plan. In addition to being deductible company expenses that can lower your corporation tax, salaries and bonuses also result in National Insurance contributions.
However, because dividends are paid from after-tax profits, they do not cut corporate tax; instead, they are taxed at a lower rate on the individual’s tax return than salary is. The success of the company, each shareholder’s tax bracket, and other personal circumstances all play a role in determining which option is best for them. To figure out the best way to divide revenues within your company tax efficiently, it’s best to speak with a tax expert.
Ways to Reduce Corporation Tax Legally
Transfer Pricing and Tax Efficiency:
The guidelines and procedures for setting the price of business-to-business transfers involving entities with shared ownership or management are known as transfer pricing. For international companies, carefully managing transfer pricing is essential since it influences the taxation of profits.
Businesses can operate more efficiently with respect to taxes by following legislative frameworks like the OECD Guidelines. To guarantee that profits are declared equitably in jurisdictions with varying tax rates and so lawfully minimise the overall tax burden, this entails setting arm’s length intercompany transaction prices.
Structuring the Business for Tax Efficiency:
A company’s tax responsibilities can be greatly impacted by its legal form. There are many tax ramifications associated with different business arrangements, including corporations, partnerships, limited liability companies, and sole proprietorships.
In the UK, for instance, running a limited company often results in a lower corporation tax rate than the income tax rates that could be applicable to lone proprietors. Significant tax savings can also result from the strategic use of holding companies and the choice of domicile for various business divisions.
Efficient Tax Planning:
A significant portion of your trade expenses is made up of corporation tax. Making sure you’re in compliance might be difficult, particularly in light of the increased reporting requirements, stricter penalties for non-compliance, and stronger inquiry practices from the tax authorities.
We provide a variety of services in order to lessen your company tax liability and free you from the hassle of keeping up with tax laws. Among them are:
- figuring out which tax structure is best for your company
- Utilising all available tax breaks and opportunities
- Reaching the ideal revenue or capital tax treatment
- Minimising acquisition tax relief and lowering disposal tax
- Maximising tax opportunities unique to your business.
What assistance may CoxHinkins Accountants provide?
The topic of UK taxation is intricate and dynamic. Depending on the specific conditions, each corporation may have a different tax liability. Thus, hiring a qualified tax accountant in the UK can assist businesses in understanding how to lower corporate tax, increase revenue, and make necessary savings.
To reduce your tax loads, CoxHinkins provides corporation tax services to businesses and makes sure they abide by HMRC’s rules and regulations. Our staff provides affordable solutions for all of your tax plans and is made up of specialists with a thorough understanding of all tax regulations. When it is feasible, we assist clients in minimising their tax obligations and optimising their tax situation. Get in touch with us for any kind of tax assistance or to lower your corporate tax.
Disclaimer: Kindly note this blog provides general information and should not be considered financial advice. We recommend consulting a qualified financial advisor for personalised guidance. We are not responsible for any actions taken based on this content.
