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 reduce corporation 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.
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 reduce corporation 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 reduce corporation 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.
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.
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 reduce corporation 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:
- Why all the confusion with R&D tax credits? 3 entrepreneurs make things clear
- UK SMEs are FINALLY tapping into the government’s R&D tax credits. Are you?
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
To reduce corporation tax in these industries, your company must pass a cultural test administered by the British Film Institute. Although the process is quite complex, the relief is significant.
When you close your business, you can transfer certain types of assets to shareholders without incurring corporation tax charges on the disposal of those assets.
This is an extremely complex part of corporation tax and, if you’re winding up a business, you must consult a UK-based accounting firm ensure that you pay the least tax possible.
What effect could Brexit have?
UK corporation tax has been relatively low for more than 15 years now. France and Germany have long complained that the UK was a de facto corporate tax haven, as the current 20 per cent is far lower than the 34 per cent and 30 per cent rates in France and Germany.
An exit from the EU would see the UK able to pursue whatever tax regime they desired with an increased level of independence.
It could well be, to encourage European multinationals and banks to stay in the UK, that the government would likely continue shaving percentage points off corporate tax and ensure that conditions in the UK remain business-friendly.
Simply put, we do not know, beyond 2020, how UK corporation tax will change. However, we have seen successive governments, both Tory and Labour, support lowering tax rates on UK-based businesses.
So for now, and into the future, the UK remains very much open for business.
Scott Brown is managing director of Sable International
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