Running your own business sometimes seems to be a series of successes followed by setbacks.
You win a big client, then lose an existing client. You hire the perfect employee and their current employer offers them more money to stay. You make a nice fat profit, and the taxman comes along and takes 20 per cent of it! Talk about three steps forward, two steps back.
Limited companies making up to £300,000 profit a year pay the ‘small profits rate’ – currently 20%.
Fortunately, there are ways you can reduce your Corporation Tax bill. The trick is to find ways to avoid tax, which you are legally allowed to do (as opposed to evading tax, that’s definitely illegal).
Of course, this is a deeply complicated subject, and you should check with your accountant before acting on any information in this article. Getting your corporation tax wrong is not something you want to do, as you may be penalised by HMRC.
Lowering your company profits
The most obvious way to reduce your company tax bill is to lower your profits. Your business is taxed on profit not turnover, so the less profit it makes, the less tax it will pay.
What direct expenses can you legally put through the business? For example, would it make better financial sense for your business to lease you a nice expensive company car? Yes you will pay personal tax on this as well, but overall you may be better off than if you went out and bought the car privately.
Remember that a limited company’s money is not your personal money – a limited company is a separate legal entity, so it’s not your own money. There are many laws governing what expenses can and cannot be counted as business expenses, so find out before you spend the cash.
This guide explains more about allowable business expenses, and is a good starting point.
It is possible to offset past losses against future profits. There are laws governing this, for example if a company changes hands this offset cannot happen. This is to stop badly-performing companies being sold as tax havens.
You may be able to claim tax allowances
You may be able to get tax relief called capital allowances on buying certain kinds of equipment and machinery.
If you are purchasing business equipment (tools, computers, furniture, machines, etc.), the main capital allowance rate for businesses is 20% per year (18% from April 2012).
Prior to April 2012, companies could claim an Annual Investment Allowance for expenditure of up to £100,000 a year, but this has reduced to 25% from April 2012.
If your business carries out a lot of research and development, you may be able to claim tax relief on some of the expense of that.
Finally, it may be worth looking at whether you want to reduce your Corporation Tax bill at all. If you want to take a lot of money out of your business, it may be more cost efficient to take a share of the profits, rather than draw a salary.
The current income tax rates go as high as 50 per cent for additional rate taxpayers, whereas company profits of up to £300,000 a year are currently only taxed at 20 per cent.
Shareholders in the company can draw a dividend – their part of the profits. You may have to pay income tax on that dividend, but overall you might be slightly better off as you won’t have to pay National Insurance contributions on it.
Your accountant will be able to advise whether or not this is a worth doing in your circumstances.
Remember to get professional advice from a qualified person before taking any action. Don’t rely purely on information contained in this article.