Corporation Tax – simple ways to reduce it.
Reducing how much COTAX you pay can be a complex issue. No one should try and illegally avoid tax, but businesses want to legally pay as little as they can.
You can reduce this tax and in this article, we will explain how.
What is Corporation Tax?
COTAX refers to the tax you pay on the profits earned by your business. You do not get billed for it every year; this is something your company has to work out by taking various things into account.
What are the rates?
The Corporation Tax rate for company profits is 19%. You pay this rate based on profits earned within the financial year.
Who has to pay Corporation Tax?
HMRC states that you must pay this tax if you are operating as a :
- Limited Company
- Other unincorporated association (such as sports club)
- A foreign company that has UK branches or offices
What is the due date for paying Corporation Tax?
COTAX does not have a specific due date; it depends on your business. If your taxable profits are up to £1.5 million, then you need to pay tax precisely 9months and 1 day after the end of your accounting period. If your taxable profits exceed this amount, then they are paid in instalments.
For those who wonder how to reduce your Corporation Tax, we outlined strategies that will help you decrease your business tax bill.
This is the best place to start by deducting your business expenses. All companies are allowed to deduct the cost for things that have been used to aid your business. For example train tickets to attend client’s meeting, office desk, paper, pens, other industry-specific supplies. Make sure you only claim things that are 100% used for your business alone.
Annual Investment Allowance (AIA)
You can purchase items for your business and then deduct the full value of them under your annual investment allowance. The current AIA is £200,000-meaning you can deduct up to that amount from your final corporation tax bill. There are loads of things that qualify for this, such as machinery and equipment for your business. It is important to note that cars do not qualify, and you cant claim this on things gifted to your business.
R&D Tax Relief
R&D Tax Reliefs are available to businesses that work on projects relating to science and technology. You could potentially deduct a bonus of 130% from your early profit, along with the standard 100% deduction. You can claim tax credits even if your company is making a loss. To qualify you have to prove that your business is part of a project relating to developments in science and technology.
EIS Tax Relief
The Enterprise Investment Scheme allows you to take advantage of various tax reliefs if you are invested no more than 30% into your company. You need to hold this investment for at least 3 years and you can earn up to £1m in tax relief per year from this. It works by allowing you to reduce your tax liability by up to 30% of the amount invested in the company.
SEIS Tax Relief
Seed Enterprise Investment Scheme-also offers potential tax relief benefits. The aim is to encourage seed investment during the early stages of a company starting up. If you invest in a company, you can get a 50% tax relief of up to £100,000 along with a Capital Gains Tax exemption for any gains in the shares you own. If you are the director, then you can use this to reduce your tax bill.
VCT Tax Relief
Venture Capital Trusts, which is essentially a company that is undergone HMRC approval and lends money to unlisted companies. If you invest in VCT, they use your money to invest in other companies. You can claim certain tax reliefs- you can claim up to 30% on your investment, with a maximum relief amount capped at £200,000.
Mileage Allowance Relief
If you use your own vehicle to carry out business work, then you can claim tax relief on a mileage rate. This refers to the cost of owning and running the vehicle. For the first 10,000 miles, you travel in the tax year, you can claim 45p per mile in cars and vans, 24 in motorcycles, and 20p for bicycles. The rate for cars and vans drops to 25p after you hit 10,000 miles. Add up your mileage and deduct the cost from your corporation tax bill.
They count as a business expense, so they should be added up when you are figuring out all your other expenses. Most people forget that they have to pay themselves a salary as well. Your business money isn’t your personal money, so pay yourself a salary and you can deduct it as an expense.
It tends to be small sums of money that are kept around the workplace to pay for certain things. Log these when adding up all your business transactions- you could have extra tax-deductible business expenses going under the radar. Make sure you log all petty cash transactions you can claim them as an expense.
Creative Industry Relief
If you are in a creative industry, then you get special tax rules. You have to pass a test to see if you qualify, there are 8 different types of tax relief you can gain, depending on what type of work you do. If you work in film production, you could claim tax relief to get an additional 100% tax deduction on enhaceable expenditure.
Patent Box Scheme
If you earn profits from any intellectual property rights that you own, then you qualify for a reduced corporation tax on that income. This is set to 10% of the standard 19%. The profits must come specifically from your patent rights and nothing else. If your business makes the majority of its earnings from a patent that you own, then you can save a fortune in COTAX every year.
Did you know that you can receive COTAX relief if you make contributions to a pension via your company? Instead of putting your own money in a pension pot, you can use company profits to do this. The amount you contribute can be taken off your overall profits, giving you less tax to pay. It is similar to paying yourself a salary, only you are contributing funds to a personal pension that you can access later in life. Both ways are a smart way of planning the future and an easy way to reduce your Corporation Tax.
Payment on Account
It means that you have set up an account with HMRC where you pay your tax in advance, based on your previous tax bill. It is a smart way to ensure that you don’t forget to pay tax but also can reduce your bill as well. All you have to do is figure out your tax bill for this year, and see if it is less than what you paid previously. If it is you’ve got a payment on account set up, then contact HMRC and you can reduce your payments. This means you don’t pay more than you should for this year.
If you pay your tax much earlier than expected, HMRC almost ‘reward’ you with some of the tax back as interest. All you have to do is to make an early payment, and you reap the benefits which reduce your overall tax bill. The secret is ensuring that you are well on top of your tax throughout the year. This is so beneficial to ensure you are managing the ins and outs of your business. If everything is nice and organized it’s much easier to work out your tax months In advance of your due date.
All companies need to pay corporation tax every year. Having said that, there are ways in which you can reduce this tax amount and pay as little as can be.