If you run a limited company, no matter the size of your operations, you are required to pay 20% corporation tax on your profits to HM Revenue & Customs (HMRC). Helping you reduce this financial burden, Turner Little explains how to lower your corporation tax bill as a small business owner.
Changing policy
The UK already possesses the lowest corporation tax rate of all the G7 nations. Also in July, then-Chancellor George Osborne announced that the UK will aim to reduce corporation tax to 17% by 2020, a commitment which new Chancellor Phillip Hammond confirmed in last year’s Autumn Statement.
However, even a 17% corporation tax can significantly cut into your firm’s cash flow, reducing the capital available to fund your daily operations and expansion efforts. You should be aware that there are a range of allowances available to help you as a small business owner reduce your corporation tax bill even further, while Brexit could also lead to beneficial changes for the UK’s tax landscape in the medium to long term future.
Capital allowances
Your firm can claim capital allowances against corporation tax, on anything which you purchase which is directly related to the operation of your business. The expenses that you can deduct from your profits, before they are subjected to corporation tax include vehicles, machinery, equipment and day-to-day operating costs, as well as any finance expenses incurred when purchasing assets for your firm.
Pension plan payments
As long as you adhere to the relevant tax guidelines, you can use payments on pension plans to lower corporation tax. The majority of firms are eligible and you will almost certainly qualify, if you have registered your business for pension auto-enrolment. You must ensure that your payments are calculated as expenses and are “wholly and exclusively for the purposes of your trade” to be eligible.
Claim R&D relief
If your business conducts research and development (R&D), which contributes to the advancement of science or technology, you could reduce corporation tax by claiming R&D relief. Data suggests that the number of small businesses claiming R&D relief rose by 24% between October 2015 and October 2016, showing its increasing popularity. But HMRC’s criteria for R&D relief is stringent and you must illustrate why you qualify to the agency, so it is wise to consult an expert before pursuing this strategy.
The Patent Box
Should your firm earn any profit via patented inventions, you can claim some of the corporation tax back through the Patent Box. For this relief, you must hold a license for the patent and be able to demonstrate to HMRC that your firm was instrumental in developing the invention. There are various categories and regulations concerning the Patent Box, so be aware that this can be a complex process.
Creative industry reliefs
If your business accrues profit through particular forms of media, you can use creative industries relief to lower your corporation tax bill. This applies to video games, certain films, animation programmes, theatrical productions, orchestral concerts and high end/children’s television programmes. You must pass a cultural test issued by the British Film Institute to be eligible for creative industries relief.
Discorporation relief
You can apply for discorporation relief, to reduce your tax obligations, if you decide to close your company. Specifically, you can transfer particular types of assets to your shareholders, without incurring corporation tax on their disposal. This is a fairly complex process, so we would suggest that you seek the advice of experts, before using discorporation relief when winding down your company.
Brexit impact
Brexit could also benefit small businesses in a number of ways. After Brexit, Whitehall will be able to develop its tax regime independent of EU regulations. Both Conservative and Labour governments have supported reducing corporation taxes for small companies before. To compete with European economic powerhouses like France and Germany, which have much higher corporation taxes, the government may take advantage of the regulatory freedom afforded by Brexit to lower the rate further.
Expert advice
The process of using allowances such as the Patent Box to lower your corporation tax bill can be lengthy and complex, as you will need to adhere to strict criteria. Therefore, it is wise to enlist expert advice, before utilising these tax allowance tools. As part of our corporate services, Turner Little can provide you with the business and legal advice services you require to handle corporation tax matters.
Turner Little
Turner Little was founded in 1998 and it has since become a well-established UK based professional Company Registration Agent, Registered Bank Intermediaries and Business Consultants, as well as Trust provider. You can receive our monthly newsletter by signing up using the form below.
