There are various ways to reduce your Corporation Tax bill. They generally come in the form of reliefs and allowable expenses – collectively known as tax deductions.
Many businesses pay too much tax every year, simply because they do not claim justifiable tax deductions. This problem is more pronounced in small businesses, where some owners may prefer to handle their own tax affairs and not engage the services of a professional accountant.
We consider 10 methods of reducing a limited company’s tax bill by applying legitimate tax deductions – several of which you may not be claiming!
Tax deductions – the rules of engagement
Rules of engagement? Perhaps ‘ground rules’ is a more suitable term; however, many see not paying too much tax as a challenge of the highest order which requires a combative attitude. Also, let’s not forget, when it comes to tax deductibles – if you don’t claim them, you will end up paying unnecessary tax. Please take a moment to consider the following ‘rules’ that will stand you in good stead:
- Claim everything you are allowed. Don’t claim anything you shouldn’t.
- Keep a record of ALL costs and expenses – no matter how small.
- Become an expert in legitimate tax deductions and allowable expenses – or hire an expert.
- Get organised.
When it comes to expenses, the general principle is that an item of expense is tax-deductible when incurred wholly, exclusively and necessarily for business purposes.
Expenses incurred for personal use are not allowable. If an item of expense is a mix of business and personal use, it may be possible to apportion part of it as tax-deductible; however, this is dependent on the item.
1. Expenses – claim everything that is allowable
There is a wide range of allowable expenses which may be claimed. Starting off with the better-known ones:
premises costs, e.g. rent and utility bills
salaries and staff costs
- bank loan interest
the cost of stock or raw materials
office costs, stationery, etc.
travel and accommodation costs for business trips
professional fees, e.g. accountancy and legal
advertising and marketing costs
- insurance payments
And then there are the lesser-known expenses – many of which are simply not being claimed by businesses:
- the cost of setting up your limited company
- the Christmas Party
- bad debts, i.e. when invoices are not paid
- mobile telephones
- bicycle mileage
- the cost of parking
- books and magazines
- business gifts
- donations to charity
- eye tests
- memberships and subscriptions
- training courses
There are different taxation and reporting rules depending on the type of expense. A full list of expenses and benefits, along with the relevant tax rules and rates can be viewed at the GOV.UK website as an A-Z list.
2. Capital allowances
Capital allowances can be claimed when a company purchases assets which are required for business use, in particular ‘plant and machinery’ (i.e. machines and equipment required for the business, as well as business vehicles including cars, vans and lorries).
Once the value of the items has been calculated, this can be deducted from the profits, before tax is worked out on the difference. As well as plant and machinery, capital allowances can also be claimed for:
- renovating business premises in disadvantaged areas of the UK
- extracting minerals and dredging
- research and development (R&D)
- patents and ‘know-how’ (i.e. intellectual property regarding industrial techniques); and
- structure and buildings (i.e. construction costs)
The full value of an asset which qualifies for the Annual Investment Allowance can be deducted from profits before tax. This applies to most plant and machinery (but not cars) up to the relevant maximum amount (currently £1 million).
In addition to the Annual Investment Allowance, the full cost of assets which qualify for ‘first-year allowances’ (e.g. some cars with low CO2 emissions) can also be deducted.
3. Trading losses
Trading losses can be used to claim a relief for the purposes of calculating Corporation Tax. Tax relief is obtained by offsetting the loss against other business gains or profits in the same accounting period. To calculate a trading loss, capital allowances (which increase the loss) and balancing charges (which reduce the loss) should be included. Losses or gains which might be made on the sale or disposal of assets should not be included.
Similar tax relief applies to losses incurred from the sale or disposal of a capital asset and on property income.
4. Research and Development relief
Research and Development (R&D) relief is designed to help companies working on innovative projects in the field of science and technology. Companies must be working on a specific project to obtain R&D relief, and they must explain:
- how a project has sought to advance science and technology
- how the project has had to try and overcome uncertainty; and
- why the solution to the problem cannot be easily worked out by a relevant professional
There are different types of R&D relief available. Small and medium-sized enterprises (i.e. those with fewer than 500 staff members and with a turnover of under 100 million euros or a balance sheet total under 86 million euros) can claim SME R&D Relief. It enables eligible companies to:
- deduct an extra 130% of their qualifying costs from their yearly profit, in addition to the normal 100% deduction, totalling a 230% deduction; and
- claim a tax credit if the company is loss making, worth up to 14.5% of the surrenderable loss
Large companies working on R&D projects (or companies who have been subcontracted to do R&D work by a large company) can claim a Research and Development Expenditure Credit. This is essentially a tax credit calculated at 12% of the company’s qualifying R&D expenditure.
Please note: R&D relief is not available in respect of research or advances within a social science (e.g. economics) sphere or which relates to a theoretical field (e.g. pure mathematics).
5. The Patent Box
The Patent Box scheme enables companies to apply a lower rate of Corporation Tax to profits earned from any of their patented inventions.
Qualifying companies which successfully elect into the Patent Box can essentially reduce their Corporation Tax from the standard rate (currently 19%) to the lower level of 10%.
6. Employment Allowance
The Employment Allowance is a scheme which allows certain limited companies to reduce their annual National Insurance contributions (NICs) by up to £4,000 each tax year. It is available to employers whose Class 1 National Insurance liabilities were less than £100,000 in the previous tax year.
Employment Allowance cannot be claimed by sole directors.
7. Business rates
Business rates are essentially a tax (similar to council tax) payable by businesses which use non-domestic properties (e.g. shops, offices, pubs etc). These are generally considered a tax-deductible business expense.
Furthermore, many businesses can obtain business rate relief which is a deduction on the standard rate. In response to the Coronavirus pandemic, businesses in the retail, hospitality and leisure sectors in England are exempt from business rates for the 2020 to 2021 tax year.
8. Creative Industry tax reliefs
Reliefs for creative industries consist of 8 different types of Corporation Tax reliefs, which allow qualifying companies to increase their amount of allowable expenditure, ultimately reducing their overall Corporation Tax bill.
Creative industry tax reliefs can be claimed by companies which make a profit from films, ‘high-end’ television, children’s television, animation television, video games, theatrical productions, orchestral concerts, museum or gallery exhibitions, etc.
The company applying for these reliefs must have responsibility throughout development, from the start of pre-production until the completion of the film, programme or video game. Or, in respect of theatrical productions, orchestral concerts or exhibitions, they must be responsible for producing, running and closing the production.
The types of creative industry reliefs available
- Film Tax Relief – the film must be intended for theatrical release and at least 10% of the core costs should relate to activities in the UK.
- Animation Tax Relief – the programme should be intended for broadcast (which includes streaming online), at least 51% of the core expenditure must be on animation and at least 10% of the core costs must relate to activities in the UK.
- High-end Television Tax Relief – the programme must be a drama, comedy or documentary.
- Video Games Tax Relief – at least 25% of core expenditure must be spent on goods or services provided from within the European Economic Area (EEA).
- Children’s Television Tax Relief – this is an extension of the high-end television relief (see above) but specifically relates to the production of children’s television programmes.
- Theatre Tax Relief – this applies to ballets or plays, operas, musical or other dramatic pieces where the performances are live.
- Orchestra Tax Relief – this applies to orchestral production companies putting on a qualifying orchestral concert.
- Museums and Galleries Exhibition Tax Relief – this is available to qualifying primary and secondary production companies that put on a qualifying exhibition.
To qualify for creative industry tax reliefs, all films, animation and television programmes or video games must be certified as “British.” Or, they must pass a cultural test or qualify through an internationally agreed co-production treaty. This process is managed by the British Film Institute on behalf of the Department for Digital, Culture, Media and Sport.
9. Goodwill and relevant assets
Corporation Tax relief is available on certain intangible assets such as intellectual property and goodwill (business reputation). Relief on goodwill and relevant assets is at a fixed rate of 6.5% a year on the lower of:
- the cost of the relevant asset; or
- 6 x the cost of any qualifying IP assets the business has purchased
For a full explanation of relevant intangible assets, see the HMRC Corporate Intangibles Research and Development Manual.
10. Working from home
Although this is covered under the earlier heading of ‘Expenses’, it is worth mentioning in light of the rising number of people working from home.
If the home is being used for business purposes, all limited companies can claim a percentage of household costs and utility bills as allowable business expenses. This can be claimed by:
- taking advantage of HMRC’s flat rate of £6 per week tax relief in respect of home working, or
- working out the exact amount by calculating the proportion of household costs that are being incurred for work purposes
Please note, if you use the latter option, you will need to keep full records of these costs, including receipts, bills or contracts.