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How to reduce Corporation Tax using tax reliefs

March 27, 2023As a small business owner, finding ways to reduce costs and increase profits is essential for success. If you’re a limited company director, one of the simplest ways to cut down your spending is by reducing your Corporation Tax bill.To do so legally, you’ll need to take advantage of tax breaks. Tax breaks, or tax reliefs, are government incentives that encourage business investment by helping business owners save money on their tax bills.Limited company directors can take advantage of most tax breaks available to them, but can only do so if their business meets the eligibility criteria.In this guide, we’ll be diving into 5 tax reliefs you can use to maximise your tax savings, the criteria you need to meet to qualify for them, and how you can claim them in your next company tax return.

How to reduce Corporation Tax

As a business owner, you’ll want to make sure you’re paying the correct amount of tax you owe — but odds are, you don’t want to pay more than you have to.

With this in mind, reducing your taxable turnover not only means you have less tax to pay, but can increase the rate of Marginal Relief you’re entitled to.Here’s where tax reliefs come in. Tax reliefs work by increasing your total business expenditure, which you can deduct from your company’s profit.

Allowable Expenses

Allowable expenses are business expenses that are incurred wholly and exclusively for business purposes that can be used to offset business profits. These allowable business expenses typically come about as part of the day-to-day running of a business, making them one of the easiest ways to reduce the business tax you owe.Some examples of allowable business expenses include:

Business travel expenses, such as train or bus fares, fuel costs, and hotel expenses.Office expenses incurred maintaining a home office or rented office space, such as rent, utilities and office supplies.Professional fees paid to lawyers, accountants and other professionals your business may hire.Equipment and supplies, such as business expenses associated with purchasing or leasing equipment or supplies.Marketing and advertising costs, such as website development, social media advertising and print advertising.Training and education, such as costs associated with attending conferences, training courses and relevant subscriptions.Employee expenses, such as salaries or wages, and pension schemes.Charitable donations made to registered charities.

It’s important to note that to claim these business expenses back, you’ll need to be stringent with your record keeping, as well as able to prove that these expenses are made wholly and exclusively for business use.In some cases, however, if an item is used for both personal and business purposes, you may be able to claim a percentage of the total cost back as an allowable business expense.Take for instance, you have a mobile phone that you use for work calls 5 days of the week, but use for the remaining 2 days of the week for personal calls. To claim part of your bill back, you’ll need to work out the percentage dedicated to professional use and find the percentage of your total bill.In this example, let’s say your phone bill is £120. First, you’d need to find the percentage that represents the amount of time you use your mobile phone for business purposes:5 / 7 * 100 = 71.4%Next, you’d need to find the percentage of your mobile phone bill dedicated to business use:120 * 0.714 = £85.68With the above example in mind, your

Capital Allowances

Capital allowances are tax deductions offered to business who have recently invested in certain assets intended for long-term business use. These breaks mean businesses can deduct 100% of the cost of an asset from their total profits, reducing their taxable profit and the amount owed to HMRC.As capital allowances can be claimed on items intended for long-term use, these assets are subject to depreciation and lose value over time. With this in mind, the amount of capital allowances you can claim on an asset depends on the type of asset and the tax year in which it was purchased.Examples of assets that can be claimed as capital allowances include:

Plant and machinery, describing items that you use to keep in the business, integral features, fixtures, alterations to a building to instal plant and machinery and demolishing plant and machinery. Cars come under this category, but have their own set of rules [link]Business premises, including the cost of installing air conditioning systems or other integral fixtures and fittings.Intangible assets, or non-physical assets, such as patents, research and development and ‘know how’.

It's worth noting there are different rates of capital allowances depending on the type of asset being claimed: writing down allowances, Annual Investment Allowance (AIA) and temporary first year allowances.

Writing down allowances

Writing down allowances can be used to deduct a percentage of an item’s value from your profits each year, with the percentage deducted depending on the item. For instance, the amount you can deduct on business cars depends on their CO2 emissions.To claim these items, you’ll need to group the items you’re looking to claim for into different pools, before working out how much you can claim separately for each pool.The 3 types of pools are:

Main pool (18%)Special rate pool (6%)Single asset pools (18% or 6%, depending on the item)

Annual Investment Allowance (AIA)

The Annual Investment Allowance (AIA) is a type of capital allowance that allows businesses to deduct the full value of an item from profits before tax.

Assets that qualify for AIA includes most plant and machinery, excluding the following:

Business carsItems owned for another reason before you started using them in your businessItems given to you or your business

Instead, you’d need to claim writing down allowances for these items.

R&D Tax Relief

Research and Development (R&D) tax credits are a valuable incentive for businesses investing in innovation, providing a valuable source of funding for eligible companies engaged in research and development.Under the UK R&D tax credit scheme, eligible companies can claim either a reduction in their Corporation Tax liability or a cash payment for a portion of their qualifying R&D expenditures. The amount you can claim, however, depends on factors including company size, qualifying R&D expenditures and company profit.For your project to count as R&D, you’ll need to be working on a specific project that aims to make advances in science or technology. Your company must be a UK registered company, or one you intend to start up depending on the outcome of your research.If you’re confident you can make a claim, you’ll need to make an application to HMRC outlining how your project:

Is looking to advance in science and technologyHad to overcome uncertainty, or tried to overcome uncertaintyCould not be easily worked out by a professional in the field

If you’re running a small business you can claim SME R&D relief if your SME has:

Less than 500 staffA turnover of under 100 million euros, or a balance sheet total under 86 million euros

Under this specific R&D tax credit scheme, you can deduct an extra 130% of qualifying costs from yearly profits alongside the normal 100% deduction, as well as claiming a tax credit of up to 14.5% of surrenderable loss if the company is loss making.Qualifying R&D expenditures that can be claimed under the UK R&D tax credit scheme include:

Staff costs, including salaries, employer's National Insurance contributions and employer's pension contributions for employees involved in qualifying R&D activities.Subcontractor costs paid to subcontractors for work on qualifying R&D activities.Consumables, such as the cost of materials and equipment.Software needed during the project.

If you're ready to make a claim but need professional support, get in touch with one of our R&D experts

today.

Dividends

As dividend payments aren’t subject to Corporation Tax, distributing dividends can be a tax-efficient way to distribute profits to shareholders while offsetting your Corporation Tax liability.When issuing dividends, you’ll instead be subject to dividend tax. with the different tax rates based on the Income Tax band you fall into. The dividend tax bands are as follows: However, you won’t pay dividend tax on any dividend income that falls within your Personal Allowance. Combined with the £2,000 dividend allowance for the 2023/24 tax year, you can earn up to £14,570 in dividends before being subject to tax. To use dividends to offset your Corporation Tax bill, you’ll need to take the following steps:

Determine the amount of dividend tax paid by multiplying the gross dividend by the applicable dividend tax rate.Deduct the dividend tax from your Corporation Tax liability for the relevant accounting period by including the dividend tax as a deduction on your company tax return.Carry forward any excess dividend tax if the amount of dividend tax paid exceeds the company's Corporation Tax liability for the relevant accounting period. As a result, you can use the excess dividend tax to offset your Corporation Tax bill in future.

While excess dividend tax can be carried forward, keep in mind that dividends can’t be used to create or increase a Corporation Tax loss, and the company must have sufficient taxable profits to use the dividend tax as a deduction in the first place.

Carrying Forward Losses

If your business makes a loss in one accounting period, it’s not all bad news — you could use this loss to offset your Corporation Tax liability in future accounting periods. As long as your business continues to trade after these periods of losses, these losses can, in turn, be used to reduce the amount of Corporation Tax you owe in profitable years.There are a few things to keep in mind when it comes to carrying forward losses:

Losses can only be carried forward and can’t be used to reduce previous years’ tax bills.not back.While losses can be carried forward for an unlimited period of time, there are time limits to when they can be used. As a rule of thumb, use your losses to offset your tax bill as soon as you can.If a business undergoes a significant change in ownership, such as a merger or acquisition, the rules around carrying forward losses can change. In some cases, losses may not be able to be carried forward at all.The losses must be used in the correct order, with losses from earlier accounting periods used before losses from more recent periods.

How to claim tax reliefs in your company tax return

If you’re eligible for any of the above tax reliefs, you’ll be able to claim these rebates when filing your next company tax return.For your claim to be successful, keeping accurate records is essential. Not only will you need them to fill out certain sections in your tax return, but you’ll need to have these records ready to present in case HMRC conducts an audit.