As a limited company, your business is liable to pay Corporation Tax on its annual profits. Fortunately, there are many different ways to reduce your tax bill, so it’s important to be aware of all the different types of tax relief available.
This article provides a brief guide to allowable business expenses you can claim, as well as tax-efficient ways to maximise capital allowances, invest in research or employee benefits, and take money from the business.
However, it’s essential to comply with HMRC guidelines when seeking to reduce Corporation Tax liability, so it may be important to take professional advice to ensure you can maximise savings while remaining compliant.
If your business is currently outside the scope of Corporation Tax, you may consider changing your business structure by incorporating to take advantage of the lower tax rate and wider range of allowable business expenses.
As the owner or a director of a limited company, you can reduce your Corporation Tax liability by paying yourself a salary or a combination of salary and other types of remuneration that are allowable as business expenses.
Some forms of remuneration are more efficient than others from both a personal and business perspective, so you may find it useful to refer to our guide, ‘What is the most tax-efficient way to extract cash from your business.’
You can reduce your Corporation Tax liability by claiming a wide range of expenses that are incurred ‘wholly and exclusively’ for your business.
One of the major categories of allowable expense is costs of sales. These include the costs you incur to manufacture or buy in products for sale as well as cost related to selling or marketing your products or services. Typically, these costs would include:
Costs of raw materials
Cost of buying products for resale
Product storage, distribution and logistics costs
Marketing and promotional costs
Discounts to retailers, wholesalers and distributors
This is a much wider category of allowable expenses and covers all the costs of running your business. Generally, these include:
Employees wages and salaries
Employee benefits, such as pension contributions or bonuses
Payments to consultants, contract workers or freelance suppliers
Communication costs, including telephone bills and broadband charges
Rent and rates for your premises, plus any maintenance or cleaning costs
Energy and utility charges
Bank charges, interest and loan repayments
Office costs, such as stationery and office supplies and equipment hire
Legal, accounting and other professional fees
Depreciation for any fixed assets
Travel costs, including train fares, fuel and car repayments and maintenance
The pandemic made many businesses recognise the benefits of working from home and many people have continued the trend, either working permanently at home or splitting their time between home and office in a ‘hybrid working’ arrangement.
If you or other directors work from home occasionally or regularly, you can claim any related expenses as a deduction from profit.
If you only work from home occasionally, the business can pay a fixed allowance set by HMRC. This is currently a maximum of £6 per week or £26 per month. You don’t need approval from HMRC or need to provide evidence of your costs within those limits. However, if you wish to claim more, you must record and retain receipts as evidence.
If you work from home on a regular basis, your costs are likely to exceed the fixed allowance. You must calculate and provide receipts for costs such as heating and lighting, broadband and telephone charges. The claims must be based on a realistic proportion of business and private usage.
There is also an option to set up a rental agreement between yourself and your business. The business pays a realistic commercial rent for the proportion of your property used as a home office. The business can claim Corporation Tax relief on the rent payments. However, you will be liable for Income Tax on the money you earn as rent.
If you set up training and development programmes, either by paying for external courses or setting up internal training facilities, you can deduct any related expenses from your profit calculations. This type of investment also has important non tax-related benefits by helping you develop a more skilled workforce.
There are many important business benefits in setting up an employee share scheme. With certain types of share scheme you can also reduce your Corporation Tax liability by claiming the costs of setting up and operating the scheme.
One of the most important employee benefits is a company pension scheme. Both employees and employers make contributions and your employer contributions are classified as allowable expenses that can be deducted from profits.
Investing in research and development (R&D) is essential for the future of your business, but it also offers you valuable Corporation Tax benefits. HMRC allows you to claim tax relief for a wide range of R&D-related costs, including:
Assets and materials
Overheads related to the research space
Licences, copyright and franchising rights
Software and software development
Research staff, full or partial costs, depending on the proportion of time spent on R&D
External research staff
Contracted research services
There are also additional forms of R&D tax relief for different sizes of business.
Businesses employing less than 500 people with a turnover less than 100 million Euros can claim SME R&D relief. This allows you to deduct an extra 130 percent of any qualifying R&D costs from annual profits. That’s in addition to the full 100 percent deduction of R&D costs, giving you a total deduction of 230 percent of costs.
Larger companies above the threshold can claim the Research and Development Expenditure Credit (RDEC) for costs incurred on qualifying R&D projects. Instead of a deduction from profits, businesses receive a tax credit based on 13 percent of qualifying R&D expenditure.
If you buy plant, machinery and other equipment for the business, you can claim capital allowances each year you own the assets. Corporation Tax relief is based on 18 percent of the value of the asset, and that value reduces each year by the amount of relief given. Cars, vans and other vehicles used ‘wholly and exclusively’ for the business also qualify for Corporation Tax relief, although the allowances differ.
As a limited company, you can also make use of the Annual Investment Allowance (AIA). By making any investments before March 31st 2023, you can take advantage of the temporary higher limit of £1 million which the Chancellor raised from £200,000. Under the AIA, you can claim the full 100 percent of the acquisition cost of any asset in the tax year you acquire it.
Another temporary benefit to use is the super-deduction tax policy. This allows you to claim tax relief on 130 percent of an eligible asset’s full value between 1st April 2021 and 1st April 2023.
Disposing of a business asset that provided capital allowances may make you liable for a Capital Gains Tax charge, increasing your overall tax liability. To reduce the liability, you can choose to dispose of the asset until the following tax year. However, if you make a loss on the disposal of an asset, you can use that to reduce your Corporation Tax bill in the current tax year.
Related: How To Read A Company Balance Sheet
If your business makes a trading loss, you can use the loss to reduce your Corporation Tax bill. However, if your allowable expenses are high in the same tax year, you can carry the loss forward to a future tax year, reducing your profit and Corporation Tax liability for that year.
This article has briefly outlined the main areas of your business where you can reduce your Corporation Tax liability. However, if your tax affairs are more complex, you may find it useful to take professional advice. Our team of accountants are highly experienced in personal and business tax issues and can help you to minimise your tax liability.