10 Top Tips to reduce Corporation Tax
Claim Every expense you are allowed
If you are failing to claim expenses, you are basically throwing money down the drain. You are losing out on tax relief gained from the expense claim and you are paying more on your Corporation Tax bill for that expense. Recording every £1 for parking fee or £3 for a stationery can be a hassle, but over a year those little expenses will add up- so it pays to stay on top of things. There is no hard and fast rules what you can and cannot claim. To stay compliant with HMRC, simply remember to only claim for items are entirely for business use.
Claim travel mileage
Limited companies are able to consider several ways in which to reduce their corporation tax through the claiming of mileage expenses. For small, limited companies with few employees, the simplest and most tax-efficient way is to run your own personal vehicles for business travel and claim back fixed-rate mileage expenses from the company. The alternatives, which include using a pool car, company car or company van, can offer some tax relief to the company by means of capital allowances but can also attract other forms of tax for both the company and the employee as a BIK.
Where employees of limited companies (including directors) use their own personal vehicle for business use, they can claim up to 10,000 miles per year at a fixed rate of 45p per mile. For anything over this limit, the fixed rate drops to 25p per mile. Only mileage for business purposes can be claimed, such as for an external meeting. Mileage for day to day commuting to an office which is your normal place of work cannot be claimed. The company can reimburse employees for these costs whilst also claiming the cost as an allowable expense to reduce corporation tax.
Use a company mobile phone
More and more workers are operating from home, with flexible working on the rise. You will want to consider supplying them with a corporate cell phone so that they do not continue to use their personal phones while they need to make business calls to consumers or clients. This can also be taken advantage of by directors of restricted firms.
However, some requirements need to be met to ensure that the availability of a cell phone does not amount to a BIK (Benefit In Kind) several conditions needs to be satisfied.
Firstly, the telephone must be a possession of the organization and does not belong to the worker. This suggests that they will need to return the phone to the company after an employee leaves. Secondly, the phone cannot be exchanged for a higher salary. This suggests that the possibility of losing getting a mobile job in return for a higher pay check cannot be offered to employers who would then use it to pay for their own personal phone. Thirdly, each employee can only be equipped with one working phone. For instance, if you are a director and you determine that you need two mobiles to operate and you are going to use one for UK customers and the other for foreign customers, as a BIK, the second phone would incur tax and national insurance as a BIK.
Finally, any contract which is taken out alongside the mobile phone must also be taken out under the company’s name, with the company paying for the bill. It may therefore be a good idea to ensure that all employees understand that they must not exceed the phone’s contractual limits of minutes, messages, or data. Where all conditions are met, the cost of the device plus the contract is an allowable tax-deductible expense that can help reduce corporation tax.
Claim R&D tax relief
Is your business making sure that it doesn’t miss out on Government backed tax reliefs for innovation? If your business pays technical staff to solve technical problems, perhaps developing new or improved processes, products, or software, then it is likely that you could be reducing your corporation tax by around £25,000 for every £100,000 spent on innovating. Tax savings may also be available for Research and Development allowances (RDAs), where you have paid for research facilities or equipment.
Where a company is eligible to claim for R&D tax credits, some of the normal tax-deductible business expenses such as salaries, materials, software etc. not only reduce the corporation tax bill, but a portion of it can be repaid to the company in the form of tax credits. How much you can receive is all dependent on the size of the company and whether the company is loss or profit making.
Work from home allowance
Many small businesses, especially start-ups, operate from home. The good news is that HMRC allows for businesses to claim some costs of using the space and utilities of a personal home as a tax-deductible expense to reduce your corporation tax.
There are two options:
- Claim a flat rate of £6 per week (an allowance of £312 per year for the 2020/21 tax year, up from £208 previous year)
- Rent a room or space in your own personal house to your limited company.
If you choose the second option you will be able to claim for more than the flat rate of £6 per week, however you should ensure that a formal rental agreement has been drawn up and that the cost is reasonable. The income you receive as rent from your limited company needs to be declared on your personal tax return. If you need help deciding which would be the better option for you, then make sure to speak to an accountant.
Put money in your pension pot
Companies can normally obtain a deduction from their profits for pension contributions paid into pension schemes on behalf of employees or directors. Payments must be made before the end of the accounting period to obtain relief. This is a quite straightforward way to reduce Corporation Tax, although consideration should also be given to the individuals’ personal tax position before making contributions.
The versatility in how you can compensate yourself is one bonus of being a business director of your own limited company. In the form of compensation or dividends, directors may obtain payments. Taking a pay check is an efficient way to lower the corporate tax and HMRC recognizes compensation as a tax-deductible company cost for staff (including directors). On the other hand, dividends are not tax-deductible and should only be paid from the income of a company. This suggests that before distributions can be taken, corporation tax must be charged on the overall earnings first.
While it can help to minimize the corporate tax by accepting a wage, it is necessary to take into account that any salary earned is subject to income tax. Therefore, it is advisable to carry out a blend of both, and we have written an in-depth article on the most appropriate way to take out the compensation and dividends of a director.
Celebrate and reward staff with annual events
One of the most common misunderstandings that catches out small business owners is the difference between client entertainment expenses for the business and staff entertainment expenses for the business. Client entertainment is a non-allowable expense for tax purposes, meaning you cannot deduct this expense from your profits when calculating your corporation tax. Staff entertainment however can be an allowable expense, so long as you follow all the rules.
This is why so many companies decide to hold Christmas parties, team building away days or other events, as it not only helps boost staff morale, but helps reduce the corporation tax bill. Even, as long as the event is conducted in a manner that complies with all the requirements that enable it to be tax-deductible, there is no need to declare the workers entertainment as a benefit in kind (BIK). The ceremony must be held regularly (around the same time of year) to ensure compliance and cannot be a one-off celebration. It is important to invite any worker, and no one can be left out or uninvited. The workers entertainment budget cannot exceed the limit of £ 150 per person per year, ensuring that you can use this budget to host several activities and do not have to invest the total in one go.
As long as only workers are present and external entities such as subcontractors, vendors or employee associates have not been identified, the organization will also demand back the VAT on expenses for the party or case. And if you do not have any employees, you should make use of this allowance! Managers with their own limited firms with no workers are still entitled to treat themselves to a celebratory celebration as long as they still follow all of the above requirements.
Pay HMRC early
If you have got the money to pay up early, this is a no-brainer. Staying on top of your tax affairs is usually rewarded by HMRC, who will happily give you some of your Corporation Tax bill back (in the form of interest) for settling up early.
Get a good accountant
When it comes to doing your VAT, bookkeeping, or payroll, are you really the best person for the job? Stop wasting time on activities that won’t help you make more money and appoint an accountant to do it instead. Okay, so you’ll have to pay for their fees. But a good accountant (like us) will usually save you thousands more by helping you claim everything you are entitled to.
Remember, tax is a complicated subject. Before trying to implement any allowable corporation tax deductions, always seek professional advice.