Starting in April 2023, the corporation tax rate would remain at 19 per cent for lower threshold taxpayers whilst up to 25 per cent for those in the upper threshold. Only higher-earning businesses, that is, with more than £50,000 annual turnover, will be affected, leaving 70 per cent of lower-earning businesses unaffected by the new corporation tax rate.
The UK government implemented this tax reform in hopes of restoring the public finances by making businesses with higher incomes contribute a larger share in taxes, displaying support for smaller businesses in the process. This calls for an even more proactive awareness and action, especially for higher earners, to find ways how to reduce their corporation tax bills.
This article will guide you to the many ways you can reduce your corporation tax liabilities, which Legend Financial’s team of tax experts advise and guide their clients with.
Claiming R&D Tax Relief
The government provides generous support for businesses investing in research and development through Research and Development allowances (RDAs). Through RDAs, you can reduce your corporation tax rate by up to £25,000 for every £100,000 that you spend on the innovation processes. Projects that count as R&D should be for science or technology advancement research, not for the field of economics, social science, or mathematics.
There are two types of R&D relief. Small businesses can claim small and medium-sized enterprises (SME) R&D relief, especially if they have less than 500 staff and 100 million euros annual turnover. Through SMEs, you can make up to a 230 per cent deduction from your annual profits.
On the other hand, larger businesses can claim Research and Development Expenditure Credit (RDEC) or smaller businesses working for large companies’ R&D processes. From April 2020, the tax credit large businesses obtain can go up to 13 per cent.
Claiming Patent Box Tax Relief
When you earn through patented inventions, own exclusive licenses for those patents’ rights, and pay corporation tax for that business, you are eligible to claim patent box tax relief, although it’s not really required that you own the patents to be eligible for the scheme. This scheme grants 10 per cent relief from corporation tax to qualifying businesses.
As long as it is the European Patent Office, the UK Intellectual Property Office, or any member of the EEA countries grants your business’ patent, you don’t have to hold a patent to qualify for patent box tax relief. Qualifying EEA countries include the US, France, Japan, Italy, and Spain.
To claim relief under this scheme, you need to elect as early as you can, preferably within two years, even before your business’ patent is granted. This is so you can immediately claim relief for your profits from the time you applied for the patent to when you are granted one.
Investing in Plant and Machinery
If you invest in allowable expenses such as plant and machinery, you can claim an annual investment allowance (AIA) of £1 million, applicable between 1 January 2019 and 31 March 2023. There is no comprehensive list of what can fall under plant and machinery investments yet. They include but do not limit to tractors, solar panels, refrigeration units, office desks & chairs, computer equipment & servers, and more.
They do not include the things you bought before using them exclusively for business or any items given to you or for the business. On claiming AIA, you have to make sure the purchase is not more than four months. If the payment is due more than this period, you can still claim AIA.
AIA allows you to claim tax reliefs on specific purchases as the ones above—up to a certain threshold, deducting the taxable profits you report in your corporation tax return as a result. This tax relief can be used against your corporation tax bill.
Mixing Salary and Dividends
For directors, the best way to be tax efficient, especially with their corporation tax liability, is to use their personal allowance effectively. You can do the same—mixing salary and dividends properly. The key is to opt for receiving a smaller salary and higher dividends.
Another type of tax to watch out for is National Insurance (NI), as you would be paying it when you reach a certain threshold. For the tax year 2022/23, a salary of at least £6,396 will make you exempted from NI whilst still qualified for the credit.
For corporation tax purposes, you can receive £11,908 or £992 per month, which means you will stay pay for NI but makes you qualified to offset the amount to corporation tax savings. Anything more than this amount, convert it to dividends so that you can avoid an accumulated higher cost of NI, which is at 28.3 per cent, compared to salaries’ corporation tax.
Claiming All Loss Reliefs as Much as Possible
Between 1 April 2020 and 31 March 2022, you can claim loss relief for up to three years in three ways—carry the loss in the current year, previous years, or future periods. This is the UK government’s temporary initiative to help businesses dragged down financially by the pandemic to stand up again from their revenue downfall.
Aside from such a reason, UK businesses of any size can claim loss relief if they have the most valid reasons. Every year, the loss that can be claimed relief is limited to £2 million. For your loss relief claim to be accepted for the purpose of corporation tax on losses, make sure to submit your claims to the HMRC not more than two years of the accounting period from which the loss happened.
Discuss with a tax expert which way to claim is best for your business—as abovementioned, you can get current-year relief, carry-back relief, and carry-forward relief. Other reliefs you can claim include group relief and terminal loss relief.
Another way to reduce your corporation tax bill is to adhere to the deadlines strictly. Getting on top of the reliefs’ deadlines will give your claims a higher chance of approval. To maximise reliefs as much as possible, you can work with tax experts alongside. They can give the most appropriate advice on how you can improve managing your taxes overall.