The company tax laws in the UK are among the most complex in the world. It’s true that there are certain legal ways to reduce your business tax obligation, but it can be difficult to know exactly what those ways are and how to use them effectively.
This article tries to give a summary of the best legal tactics that UK companies might use to lower their business taxes.
We’ll examine some of the other alternatives available to UK firms looking to lower their tax obligations and offer advice on which ones would be most appropriate for your specific circumstance.
You’ll gain a better grasp of the different legal ways you can legally reduce your corporation tax liability while still abiding by the law by reading this book.
Â
- Capital Allowances: UK businesses can use capital allowances to lower their corporation tax. This tax break is accessible right now, and over the course of several years, the cost of the asset can be subtracted from the company’s taxable revenue.
Businesses can decide whether to deduct the cost of an item over time or to immediately claim a one-time credit for capital investments. The cost will vary depending on the type of asset purchased; for instance, fixtures and fittings are subject to lower rates than operational machinery or equipment.
Additionally, businesses have other choices, such as Enhanced Capital Allowances, which provide 100% upfront tax relief for the purchase of energy-efficient goods that satisfy specific HMRC requirements. Additionally, companies have the option to use the Entrepreneurs’ Relief when selling an asset, which entitles them to a 10% tax rate reduction on any profits generated by the sale. In general, this is a fantastic approach for businesses to lower their Corporation Tax liability and organise their money.
For more information about Capital Allowances, visit the Gov.uk website at https://www.gov.uk/topic/business-tax/capital-allowances.
- Research & Development (R&D) Tax Credits: These credits allow businesses to deduct taxes from projects that they deem to be creative and that enhance current goods, procedures, or services.
In order to encourage creativity and the creation of cutting-edge technologies in the scientific and technology sectors, the programme was first introduced in the early 2000s.
It’s a sizable (and extremely useful) incentive since it offers a sizable tax rebate on qualifying R&D expenses. The credit, which can be repaid in cash or as a decrease in corporation tax, can really cover up to 33.35% of a company’s R&D expenses.
R&D Tax Credits are available to every UK company, regardless of its size, sector of operation, or level of profitability. A claim is likely if qualifying research and development activities have taken place and the company is registered for UK Corporation Tax.
- Structural Modifications: UK businesses can benefit from structural modifications to formally lower their Corporation Tax. They can get reduced tax rates and more beneficial deductions by combining two or more businesses under one legal organisation.
Additionally, certain companies may be eligible for various tax breaks that could lower their corporation tax rate without compromising their profitability or flexibility. Additionally, businesses can save money by moving people and assets between various corporations in a method that doesn’t result in any Corporation Tax liability.
For instance, transferring tangible assets like real estate or equipment could help a business reduce costs while still abiding by UK tax regulations.
Last but not least, larger firms might benefit from group relief provisions, which let them balance losses across various entities and lower their overall Corporation Tax liability. UK companies can significantly reduce their yearly Corporation Tax payments with careful planning and the wise application of structural modifications.
Â
- Transfer Pricing: UK businesses are permitted to utilise transfer pricing to formally lower their corporation tax. In order to transfer earnings from tax jurisdictions with higher tax rates to tax jurisdictions with lower tax rates, this entails pricing transactions between subsidiaries or connected parties in other countries.
The easiest approach to achieve this is to guarantee that the transfer prices utilised are fair and accurate representations of market realities. Companies should also think about benchmarking performance, getting independent intangible asset values, and making sure their transfer pricing strategies comply with the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.
Additionally, UK businesses need to be aware of HMRC’s Transfer Pricing Adjustment regulations, which specify how profits are taxed when a business divides its operations across several nations. These regulations cover things like audits of transfer prices, disclosure requirements, fines, and services for dispute settlement.
Last but not least, having reliable governance systems in place will also help ensure adherence to all pertinent transfer pricing laws and regulations in the UK.
- Investing in Enterprise Investment Schemes (EIS): UK businesses can employ EIS investments to formally lower their Corporation Tax obligations and enhance their overall financial performance. Through this programme, businesses can earn income tax reduction of up to 30% while deferring their taxes for up to three years after making the investment.
As a result, the initial investment might be decreased by up to 30%, lowering the entire Corporation Tax payments. Additionally, if EIS shares are sold after being held for longer than three years following the initial purchase, any earnings are exempt from capital gains tax.
This has a double effect on lowering a company’s corporation tax since, in addition to the initial investment amount being reduced by up to 30%, any profits made from selling those investments will also be tax-free.
The benefits of EIS investments extend beyond big corporations; smaller companies can also benefit from this programme to boost their finances and lower their tax obligations. For instance, a lot of small businesses reserve a particular portion of their annual budget just for EIS investment.
This enables companies to invest in bigger projects that may eventually yield greater returns and help them raise earnings while lowering their tax obligations concurrently.
- Offsetting Losses: For UK firms, offsetting losses is a very helpful approach to lower their corporation tax payment. It may also be a terrific way for businesses to recoup from any unanticipated losses. In order to lower the amount of corporation tax they owe; the procedure enables businesses to apply any losses from prior years against forthcoming revenues.
By increasing the loss amount by 19%, it is possible to reduce the company’s current corporation tax liability by 19p for every pound lost. Companies are permitted to carry forward their losses for up to nine years, so even if they don’t use their losses in a given year, they will still gain from them in succeeding years.
Businesses must present proof of the loss experienced, such as a legitimate invoice or statement proving the cost expended, in order to make a claim under this section. Additionally, there are a number of limitations on the use of offsetting losses, including the inability to balance losses against profits within a group of businesses and the ability to only offset losses against commercial revenue (not capital gains).
However, Offsetting Losses continues to be a successful tactic for companies wanting to lower their corporate taxes during tough times, and UK SMEs searching for possible tax reductions shouldn’t dismiss it.
- Making use of capital gains tax reliefs: By utilising specific exclusions and allowances, UK corporations can use capital gains tax reliefs to legally lower their Corporation Tax. These tax benefits can substantially lower a company’s tax obligations when it sells assets like shares or real estate within specific dates.
For instance, the annual exempt amount can shield up to £12,300 in chargeable gains from taxation in any given tax year, while the Business Asset Disposal Relief (previously known as Entrepreneurs’ Relief) can allow up to £10m of chargeable gains arising from the sale of certain business assets to be taxed at only 10%. Additionally, businesses might be able to apply the Gift Hold Over Relief, which enables them to postpone CGT by giving ownership of a taxable asset to a third party, with the resulting gain being postponed until the item is eventually sold.
A company’s CGT burden can be further reduced by additional, more complicated reliefs such the Seed Enterprise Investment Scheme Relief.
In order to avoid paying more corporation tax than necessary on sales of qualifying assets or transfers of ownership, it is crucial for businesses to fully utilise these reliefs.
- Invoicing Expenses Separately: Employing this tactic, businesses can invoice their overhead expenses apart from sales revenue, preventing the costs from being factored into calculations of taxable income.
As a result, they are able to dramatically lower their taxable profit margin while still maintaining adequate cash flow levels. Additionally, because such invoicing is an overhead expense and not a component of a sale, it is free from Value Added Tax (VAT).
Companies must make sure that all overhead expenditures are invoiced individually and that they adhere to HMRC’s guidelines regarding deductible expenses for tax reduction in order to get the most out of this strategy. In case HMRC or other organisations conduct an audit, businesses should make sure to maintain proper records and papers relevant to their invoicing.
To exploit the potential advantages of this approach, businesses should routinely review their records and ensure that all costs are appropriately accounted for. UK businesses can significantly reduce their Corporation Tax bills and boost profitability by utilising the benefit of billing expenditures separately.
- Delaying Dividend Payments: In the UK, businesses have the option to formally lower their Corporation Tax by legally delaying dividend payments until after the tax deadlines have passed.
By using this strategy, firms can more effectively control their cash flow and pay less tax on the dividends that are declared. Businesses can enjoy lower taxation and higher levels of liquidity by deferring dividend payments until corporation tax deadlines have been satisfied.
This supports the financial stability and market competitiveness of UK businesses. Additionally, when dividends are received after tax returns have been filed, businesses can prevent double taxation at both the declaration and receipt stages.
For UK-based businesses, deferring dividends provides additional advantages such as the ability to reinvest more capital in their operations, which can help them expand their firm in a more sustainable way.
Delaying dividend payments is therefore a successful tactic for many UK businesses wanting to formally decrease their Corporation Tax obligations.
- Reclaiming Losses and Credits from Abroad: By claiming foreign losses and credits, UK businesses can legally lower their Corporation Tax in one of the most efficient ways possible. This can assist in offsetting any losses in foreign exchange rates, tax obligations, or other expenses related to conducting business abroad.
If a business works in several nations, for instance, it could be eligible to claim a foreign tax credit for taxes paid on profits made there. As a result, less UK corporation tax would be owed.
Additionally, if a corporation has suffered losses in a foreign country as a result of exchange rate changes or other uncontrollable circumstances, these losses may also be deducted from its taxable income in the UK.
This implies that it will only pay tax on the remaining balance after deducting these losses, rather than paying corporation tax on the entire amount of profits derived from overseas operations.
UK companies are able to gain from higher profit margins and improved cash flow, which eventually results in greater financial stability and more competitive business performance by employing claiming foreign losses & credits to legally decrease their Corporation Tax.
Conclusion
Any UK firm should be concerned about lowering the burden of Corporation Tax.
There are a number of legal techniques that can assist you in doing this, even if it may not always be simple to do so. There are a variety of strategies that are available that could ultimately save your organisation money, from funding R&D initiatives and capital allowances to using approved investment plans.
Of course, you should always put seeking professional guidance on which techniques are best for you as well as knowing how they will impact your overall tax burden as a top priority.
Ultimately, you can ensure that your company has a bright financial future and remains competitive in the UK market by employing these 10 legal strategies to lower your Corporation Tax bill.
This article was written by Itas, who are experts in accounting for UK firms and Sage Intacct
About us
This article was written by Itas Solutions. We’re a UK–based accounting firm specialising in Sage Intacct. If you would like to know more about Intacct and how it can help you and your CFO, we would be more than happy to demonstrate the advantages of using powerful cloud accounting software like Intacct.
Itas Solutions started off serving one client in 1995 and now services over 200 businesses across the UK. We are always available to assist our clients.
Itas is a business that our customers have trusted for more than 20 years, and we have expanded thanks to recommendations from them and IT professionals who value our educated but personalised service.
To discover more about how Itas can help your business with finance automation, Sage implementation, and increased purchasing management, contact us at info@itassolutions.co.uk, phone us at +44 (0) 1824 780 000, or send an email.