Corporation Tax – planning tips

Corporation Tax

 

Around two million trading companies in the UK will be familiar with paying corporation tax at 19% on any company profits.

 

Directors of those companies also know how that percentage can eat into those profits when the time comes to extract them.

 

The good news for them, and profit-making companies, is that the rate of corporation tax is set to fall from 19% to 17% from 1 April 2020.

 

Whether or not that comes to fruition after a year of extreme political upheaval, including the cancellation of Budget 2019, remains to be seen.

 

But last year alone, corporation tax netted the Treasury £55.1 billion – more than enough to cover Boris Johnson's £33.1bn Brexit divorce bill.

 

While the 2018/19 figure represented a 2% rise on the previous year, it also increased for the sixth successive year.

 

With that in mind, what can you do to ensure you minimise your corporation tax bill and keep more of your company's hard-earned profits?

 

Choosing the right business structure

 

According to Companies House, 672,980 companies incorporated in 2018/19 – an increase of 8.5% on the previous year and the highest number of annual incorporations since the depth of the recession in 2009/10.

 

More than a third (35%) of those new companies were aged between one and four, making the move from sole trader or partnership.

 

The lower rate of corporation tax (19% in 2019/20, reducing to 17% in 2020/21) often makes incorporating more appealing than paying a marginal rate of income tax.

 

Residential landlords, for example, are benefitting from incorporating as the phased reduction of mortgage interest relief does not apply to companies.

 

Utilise tax reliefs

 

Corporation tax bills can be reduced through tax planning and identifying reliefs to which your company might be entitled.

 

Research and development (R&D) relief is available for both smaller and larger companies that work in innovative projects within science or technology.

 

Smaller companies with less than 500 staff, a balance sheet of less than €86 million and turnover of less than €100m may be eligible for SME R&D relief.

 

This enables them to subtract 130% of their qualifying costs from their annual profits on top of a basic 100% deduction (230% in total).

 

Larger companies that carry out R&D projects or subcontracting SMEs may qualify for the R&D expenditure credit.

 

Companies that generate and hold income from a patent can reduce their corporation tax bill from 19% to 10% by electing into the patent box scheme.

 

Some film, TV and theatrical productions, as well as certain museum and gallery exhibitions, can be eligible for creative industry tax relief.

 

Other tax reliefs are available to reduce your corporation tax bill. Get in touch with one of our experts to find out more.

 

Capital allowances and the annual investment allowance

 

You may be able to offset certain costs, such as any equipment, machinery or vehicles, you buy for use in your company.

 

These costs extend to demolition expenses for your plant and machinery, and integral features, such as CCTV systems or fire alarms.

 

An integral feature is a typically broad term and could be anything from a heating or air-con system to lighting or elevators.

 

The annual investment allowance lets you deduct the full cost – up to £1 million until 30 December 2020 – of an item from your profits before you work out your tax.

  

Extracting profits

 

Recent changes to how dividends are taxed gave rise to another tax-efficient option when it comes to extracting profits.

 

Directors can place up to £40,000 into their pension in 2019/20 from their company's profits without paying tax.

 

When the time comes to start receiving a pension, 25% is usually tax-free and taxed at marginal rates of income tax with no national insurance liability.

 

If you would like to discuss any aspect of Corporation Tax please contact your nearest Lentells office.

Chard Office - 01460 64441, chard@lentells.co.uk 

Seaton Office - 01297 20584, seaton@lentells.co.uk 

Taunton Office - 01823 286274, taunton@lentells.co.uk