Corporation tax is the unavoidable reality of running a profitable company. If you are looking for an upside – the bigger the tax bill, the more profitable the business. However, that does not mean that you must waste cash on a tax bill that is bigger than it should be.
With tax in the UK now so complicated there is now an entire government department dedicated to simplifying it, the only way to ensure that you are paying the correct (by which we mean lowest) amount of tax is to work with an expert.
Let us be clear here, we do not advocate complex tax avoidance schemes or any form of tax evasion, but we do believe in sensible tax planning and making sure you utilize all the tax credit and deductions available to your company.
Who pays corporation tax?
Sounds like an obvious question – companies pay corporation tax, but only if they have a taxable profit. Companies can be very profitable from an accounting perspective, present a healthy level of operating profit – but if they have invested heavily in fixed assets, or research and development (R&D), or have suffered losses in the past – they may not pay any tax at all.
Companies can also be exempt from corporation tax, if they are a recognised Charity or Social Enterprise, or have applied for dispensation as a non-profit making company (such as a residents association).
Profit on the P&L is not the profit that is taxed
Profit as shown on the profit and loss account is rarely the profit that will be subject to corporation tax. There are many reasons for this, but it generally boils down to the fact that there is a degree of flexibility and judgement on the part of the Directors of a company as to how they choose to account for things; whereas HMRC has a set of rules that are applied across every tax paying entity.
Profit as shown on the profit and loss account is rarely the profit that will be subject to corporation tax
Take fixed assets as an example. Your business might purchase a machine and decide that that machine is likely to be useful for ten years and therefore you depreciate it over that period. HMRC’s rule however mean that you can take a far larger tax deduction in the year of purchase (up to 100% of the cost depending on the value) and then an ever-diminishing amount thereafter. In this case, HMRC’s rules will reduce the taxable profit compared with the accounting profit.
There are certain things that are never tax deductible
Client entertaining is never an allowable expense. It may be a valid business expense and appear in your Profit and Loss Account, but HMRC are never going to allow it as a tax-deductible expense.
There are a large number of other things that HMRC will not give you tax relief on, and some grey areas. For example, a short presentation in something relevant to the business or industry, in a nice location, followed by some networking and drinks, could well be allowable (and clients are hopefully entertained too).
As with most things tax related, it is better to seek the advice before you act to avoid a surprise at the end of the year when you discover that that box at Wembley for the FA Cup final is not a tax-deductible item.
Other great tax reliefs that go unclaimed
Research and Development (R&D) is a fantastic relief aimed at de-risking businesses who speculate on developing an advancement in their field. There are some criteria to be met (for example developing a new website does not qualify), but inventing a way to integrate systems in a way that has never been done before – and that you were not sure about at the outset – will most likely qualify.
R&D is a fantastic relief aimed at de-risking businesses who speculate on developing an advancement in their field
The relief gives you (as an SME) credit for an additional 130% of your qualifying expenditure to set against your taxable profits; or if the circumstances are right, you can take a cash payment if you have no tax to pay.
Owner managed business can save the most tax
For owner managed businesses the opportunity for tax planning is extensive and involved, but undoubtedly worth it. Please get in touch to see how we can help you balance company and personal tax bills.