Reducing your company’s corporation tax is much more complicated than reducing capital gains tax. With capital gains, there are several reliefs and exemptions that you can look into to see if you qualify. Corporation tax, on the other hand, is determined based on your company’s profits. Therefore, in order to reduce corporation tax, your company needs to minimise their profits. While this may sound easy to accomplish, it is much more complicated in practice than it seems.
Below we have listed some of the most effective ways to reduce your company’s corporation tax bill:
Participate in Pension Contributions
One way to minimise corporation tax is to make pension contributions. Because these contributions are not confined by the employee’s annual allowance, companies can essentially make as large of pension contributions as desired, achieving high levels of tax relief.
The most tax-effective method of extraction for company directors is to make large pension contributions with low salaries. In order to qualify for tax deductions, however, these pension contributions must be incurred exclusively and wholly for trade purposes. This means that the size of the pension contribution needs to align with the salary package of the employee in order to reflect a natural business motive for the contribution amount.
If pension contributions are too large proportionate to the salary package of the employee, the Revenue can argue that there was a non-business purpose for the pension contribution and therefore disqualify your company from tax relief.
This is because under classic circumstances, where employees are not connected to employers, pension contributions would qualify for tax reliefs under the basis that the payment is for a standard business purpose. In the case where the employee and employer are connected, however—such as the case of the company director—the Revenue is more critical of the transaction in order to ensure that pension payments are made for business purposes only, and not for other incongruent personal gains. The HMRC has stated on the matter:
“…One situation where all or part of a contribution may not have been paid wholly and exclusively for the purposes of the trade is where the level of the remuneration package is excessive for the value of the work undertaken by that individual for the employer…”
Because of these regulations, your company needs to make an argument that salary and pension contributions are incurred wholly and exclusively for trade purposes and no ulterior non-business motives were involved.
In order to qualify for tax relief and deductions, without provoking objections from the Revenue, it is important to carefully determine pension contributions in proportion to salary payments and the value of the work that the employee has contributed to the business.
When reviewing the total value of a remuneration package you should calculate salary and pension contributions compared to services provided.
Companies that purchase capital assets can qualify for Annual Investment Allowances (AIA). Capital expenditures that qualify for AIA can be deducted from their company’s profits at their full values before corporate tax is calculated.
For the 12-month period beginning 1 January 2016, AIA is £200,000. Keep in mind that expenditures can only claim AIA during the accounting period in which they are purchased, and any expenditures spanning an accounting period will be prorated.
Most companies can qualify for AIA on any plant and machinery expenses. These expenses can include certain company vehicles (trucks, vans, motorcycles, etc.), ‘integral features’ of a business’s building, and some alterations to add additional plant and machinery.
If a single expenditure exceeds the AIA limit, the excess value can be claimed using written down allowances with a single-asset rate of 18% or 8% contingent on the item.
Writing down allowances can also be used for the deduction of some expenditures that don’t fall under AIA. For example, company cars do not fall under AIA, but can be claimed using writing down allowances. The rate of deduction for company cars depends on their CO2 emissions.
In order to benefit from AIA and writing down allowances, you should review your company’s capital expenditures in order to determine what assets can be claimed and used for profit reduction purposes.
Provisions are a way for you company to account for planned expenditures, thereby claiming tax deductions before the expense is incurred.
Provisions are allowed under the following circumstances:
- The company is subject to current legal or binding obligation to make payments for the expenditure.
- The payment obligation is a result of past events
- There is a likelihood that the company will experience a ‘transfer of economic benefits’ (meaning that they will probably incur a cost) related to the obligation.
Some examples of allowable tax provisions, provided by the Revenue, include:
- During the period of sale, sellers of merchandise may claim the cost of work for potential future warranty expenses (or other expenses covered by consumer protection legislation).
- Refundable commission for a lapse in policy by insurance intermediaries, where the commission was recognised as income at the time that the policy was established.
- Rectification work for builders, accountable for expenses matching the level of income recognised within accounts.
- Future upkeep on plant and machinery.
If a residential property is used at any time exclusively for business purposes, the company can qualify for corporate tax deductions for the period of time that the house is in corporate use.
If a home is used partially for living purposes and partially for business purposes, the property bills will need to be examined in order to determine the amount of deductions that can be claimed, depending on the amount of time when the property was being used for business, rather than living, purposes. In order to qualify for corporate tax deductions, the appropriate billing amounts will need to be charged to the company (ie. by crediting the expenses to a director’s loan account).
When considering what home expense to claim, consider aspects like:
- Area: what portion of space is used for company purposes?
- Usage: how many resources are consumed during business activities (ie. electricity, water, gas, etc.)
- Time: how much time is the home used for private vs corporate purposes?
Other deductions to consider include incidental costs of loan finance and double tax relief. We will look into these deductions shortly.