No one likes to pay more tax than they have to, which is why accountants are constantly besieged with requests from corporations to reduce their tax liability.
The good news is, there are several government-backed ways you can get tax relief and reduce your annual bill to the HMRC. Here, we lay out our top tips for lowering your taxes while also making the most of business expenses:
1. Claim R&D and patent tax relief
If your business is working on developing new or improved products or processes or if you hire technical staff to solve technical problems, you may be eligible for R&D tax relief. Several costs can be included in an R&D tax relief calculation, including:
- Payments to the subjects of clinical trials
- Sub-contractors and Externally Provided Workers (EPWs)
- Consumable materials used during the R&D process, including heat, water, power, and light
- Staffing costs, including salaries, employer’s National Insurance and pension contributions, and bonuses
When assessing R&D tax relief claims, please note you can only claim 65% of the qualifying spend of the sub-contractors’ costs. There is a maximum of 230% of the original Qualifying Expenditure (QE), which can be cashed in.
From April 1, 2021, SMEs applying for R&D tax credits can receive a maximum of £20,000 in repayments per annum in addition to three times the company’s total PAYE and NIC liability. That is, of course, subject to a few exemptions.
Alternatively, if your business holds patented inventions from which you are earning profits, you can claim Patent Box tax relief and reduce your corporation tax for those profits to 10%.
2. Get Annual Investment Allowance (AIA)
The AIA allows businesses to claim immediate tax relief on purchases that qualify as business investments, such as plant and machinery. At present, this is about £1 million. So, you can write off a good fraction of your investments against your profits.
3. Make use of the super-deduction scheme
Between April 1, 2021, and March 31, 2023, companies that invest in specific qualifying plant and machinery assets can claim a 130% super-deduction capital allowance on qualifying plant and machinery investments.
This can potentially help them cut their tax bill by about 25 pence for every pound invested. If you are looking to accelerate your growth post-pandemic by investing big, this allows you to do so without breaking the bank.
4. Leverage share schemes
Often, you can get tax deductions against share schemes that you offer to your employees. This is an excellent way to save on tax and incentivise your employees simultaneously.
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5. Claim loss reliefs
If you are eligible to claim any loss relief for the year, do so. You can carry these back to a previous year to generate a tax refund or carry them forward against your future profits.
6. Claim business expenses in full
Look through all your records and check with your board of directors and executive team to ensure that you have claimed all your business expenses, however small.
7. Ensure family members hold alphabet shares for separate distributions if they are low earners
Tax law defines a settlement as ‘any disposition, trust, covenant, agreement, arrangement or transfer of assets.’ So, for an owner-managed company, like a family company, a settlement situation could arise if an individual enters an arrangement of diverting income from one to another, leading to a tax advantage.
A similar situation could arise if the dividend on a specific class of shares could not have been possible without another class of shares receiving little to no dividend. There are anti-avoidance measures in place to avoid such diversions.
As a solution, alphabet shares allow for flexibility in dividend payment so that you can change dividends paid out in the future without having to alter the shareholding.
Also, having enough distributable profits to pay dividends to everyone will avoid allegations of ‘settlement charges’ from the HMRC.
8. Amp up pension contributions
You can usually claim a deduction against pension contributions you make for your employee’s pension fund as a company. However, these need to be made before the close of the accounting period to qualify for relief.
While pension contributions are tax-free in the absolute sense, making pension contributions out of company earnings does not actually reduce taxable income for the company.
One solution in this regard is to offer a salary sacrifice scheme. You make extra pension contributions on your employee’s behalf to reduce their salary by a certain amount.
This helps you save on National Insurance (NI) contributions. Of course, make sure your employees are okay with this policy first.
What to expect from upcoming changes to corporation tax
From April 1, 2022, the primary corporation tax rate will remain at 19%. However, this is due to change from April 1, 2023 when there will be a Special Small Profits Rate (SPR) introduced and the 19% rate will only be applicable for businesses with profits upto £50,000. The new corporation tax rate will be set at 25% for profits above £250,000, and for businesses making between £50,000 and £250,000, a taper for the tax rate will be introduced from the top rate of 25%.
This will simplify the tax payment process, as companies need to know which category they fall in and then pay accordingly. You might need to update your internal software systems to prepare for that fully.
Over to you
In short, there are plenty of ways for you to bring your tax bill down for the next financial year. Talk to Bradleys Accountants and chalk out a plan in advance of the tax deadline to have time to apply for relief as necessary and minimise the taxes you owe.
Remember, the government wants to support your business — so if you are genuinely in need of assistance, you will likely find plenty of legal options to help you out.
