Tax & admin 4 January 2017

How to reduce corporation tax as a small business owner

UK business owners enjoy some of the lowest corporate tax rates in the world but there are ways to reduce corporation tax even further
Writing for Business Advice, Scott Brown, managing director of financial management firm Sable International, offers essential tips to UK business owners looking for ways to reducecorporation tax.

This article was updated on January 8 2019 to reflect legislative changes.

What is corporation tax?

Corporation tax is like income tax, but for private businesses. The rate of corporation tax is based on the profits generated by a company. Set at 19% since April 2017, corporation tax is favourable when compared to rates of income tax.

After setting up a limited company, owners have three months to register for corporation tax with the government.

Register for corporation tax at GOV.UK.

Declining corporate tax rates

Corporate tax in the UK has been steadily declining over the last few years. Currently, the UK has the lowest tax rate (19%) in the G7 and by 2020 it aims to have the lowest in the G20. This is already great news for corporates looking to establish themselves in the UK.

The government remains committed to lowering corporate tax rates. In 2016, chancellor Philip Hammond stated that the corporation tax rate will be lowered to 17% by 2020.

But even in a tax regime as lenient as this, there are ways to further reducecorporation tax and decrease the amount you pay on your profits in the UK.

There are existing legitimate allowances and reliefs that can aid British-based businesses. There is also the looming exit from the EU which will likely alter the corporate tax landscape.

Payments into pension plans

Payments into pension plans can be an excellent way to reducecorporation tax, however, there are tax guidelines that must be adhered to.

Most businesses qualify and if you’re already registered for auto-enrolment you will almost certainly qualify for some form of relief.

You need to make sure that your payments are calculated as expenses and that they are made wholly and exclusively for the purposes of your trade. This is an often-tricky distinction, so it’s always best to consult with a tax expert before you start trying to seek this kind of relief.

Capital allowances

You can claim capital allowances when you buy assets that are directly related to running your business. Items like equipment, machinery and vehicles can all have some or all their value deducted from your profits before those profits are taxed.

In addition to these items, you can also claim on your business’s day-to-day running costs and interest payments as well as finance costs for buying assets for your business.

Other reliefs

Tax relief can be claimed for expenditure on research and development, intellectual property and patents to name but a few.

Research and development relief

If your research and development project advances overall knowledge or capability in a field of science or technology, you could be able to reducecorporation tax by claiming some relief on your profits.

HMRC has specific guidelines on this category of relief and each business must justify why its work qualifies for this relief. it’s best to consult with an expert if you intend to make use of this relief.

Read more about R&D credits:

The Patent Box

If your company earns profits from patented inventions, you will be able to claim some of that tax back via the Patent Box. You will need to have the exclusive license on the patent to claim this relief and you must be able to show that your company was instrumental in developing them.

You must make representations to HMRC to be eligible for this relief. There are a variety of categories of patents and rules and regulations surrounding this relief.

Creative industry tax reliefs

There’s good news for companies that make their profits from specific forms of media. You can claim relief if your company is directly involved in the production of the following:

  • Certain films
  • High-end and children’s television programmes
  • Animation programmes
  • Video games
  • Theatrical productions and orchestral concerts

 
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