Take advantage of Corporation Tax relief and allowances to maximise profit and minimise your tax liabilities. Here’s how to make the most of your Corporation Tax allowances.
Corporation Tax is calculated against the annual profits a business makes, and is paid to HM Revenue & Customs (HMRC) each year. Corporation Tax is currently set at 20% of all company profits, but will reduce to 19% in 2017 and 17% in 2020.
It pays to learn about Corporation Tax relief and allowances when starting your new business, as it can help you keep more of your profits and pay less in tax.
Taking advantage of Corporation Tax relief and allowances isn’t tax avoidance. They are legally permissible allowances that businesses can use to offset some of their tax liability against the profits their business makes.
Corporation Tax relief and allowances is a complex area, and it’s best to talk to an accountant to get a professional view on the amount of Corporation Tax you need to pay, and what allowances and relief you’re entitled to.
Corporation Tax and allowable expenses
As Corporation Tax is calculated on the profits a business makes, ensure that all allowable business expenses have first been deducted. This means you won’t have to pay tax on purchases made in the running of your business.
Most business expenses are allowable, as long as they follow a simple rule: the expense must be necessary, wholly and exclusively for business purposes. This means that an online service used for running an online business and nothing else, is an allowable expense. Other, obvious expenses are things such as salaries paid to staff including yourself are permissible, whereas some expenses such as entertaining and some company formation costs are not allowable. In all cases, keep records and receipts of expenses to share with HRMC.
Pension contributions and Corporation Tax
Payments made by the business into recognised pension schemes, such as private pensions held by employees including directors, are usually an allowable expense. The key is to ensure that the contribution is reasonable and can be justified – simply paying all the profits into a private pension scheme of a shareholding director could be seen as tax avoidance by HMRC and lead to an investigation. But, a reasonable contribution is a justified allowance that reduced profits and therefore the amount of Corporation Tax you’ll need to pay.
Research and development tax relief
If your new business is investing is research and development, you can offset the amount you spend on R&D by 130% against profits. For example, if the business spent £10,000 on research and development, you’d be able to offset £13,000 (£10,000 multiplied by 130%) against your profits. If your business realised £13,000 in profit, this would mean your taxable profit would be zero, and the business would not owe any Corporation Tax.
Most businesses that are developing or improving a new product, process or service can typically offset 130% of the costs against profit when reporting Corporation Tax. Reasonable expenses would be staff costs such as consultants, consumables such as heat, power, equipment and materials as long as they’re used or transformed by the R&D process.
Capital allowances and Corporation Tax
While business expenses such as salaries can be offset against profits when calculating Corporation Tax, some costs such as purchasing assets are not allowable as they remain an asset on the businesses balance sheet. In this case, most small businesses can take advantage of HMRC’s Annual Investment Allowance (AIA). This allows small businesses to spend up to £200,000 per year on equipment and other capital assets and deduct 100% of the cost from annual profits when calculating Corporation Tax.
Some other assets – primarily environmental assets – attract 100% of relief as well against profits. Some assets are excluded from AIA – including cars and any personal assets, such as a laptop or office furniture, that you already owned before starting the business.
Find out more about capital allowances at the government’s Business Guide website.
Other Corporation Tax relief and allowances
Depending on the nature of your small business, you could be entitled to Corporation Tax relief. Creative industries – such as film, theatre, animation and video game companies – can claim additional relief. Your business must be directly involved in making creative works in these industries, and there are different rules and rates depending on the type of production your company is involved in.
A further type of tax relief for Corporation Tax is the Patent Box – which allows companies that earn profits from patented inventions after April 2013 to claim a lower rate of Corporation Tax on those profits. This lower Corporation Tax rate is 10%, and applies to profits made on goods incorporating the patented part, through licensing or selling the patent rights, or any money awarded for infringement or damages relating to the patent.