How to reduce corporation tax as a small business owner

British business owners enjoy some of the lowest corporate tax rates in the world – but there are ways to reduce corporation tax even further

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.

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 (20 per cent) 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 recent Autumn Statement confirmed the government’s commitment to lowering corporate tax rates. The chancellor stated that the rate will be lowered to 17 per cent 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.

Capital allowances

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.

Other reliefs

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 reduce corporation tax by claim 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.

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.

Disincorporation relief

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 in to the future, the UK remains very much open for business.

Scott Brown is managing director of Sable International

Everything you need to know about your first self-assessment tax return

The UK tax year runs to 5 April each year

The Christmas holidays are over, which means that for many small business owners it’s time to start thinking about their self-assessment tax return as the January rush has started

Here Emily Coltman FCA, chief accountant to FreeAgent – provider of award-winning cloud accounting software for freelancers, micro-businesses and their accountants – offers her top tips to help make your first year of self-assessment as painless as possible.

More than ten million people in the UK are required to file a self-assessment tax return – including the country’s five million or so freelancers and micro-business owners – and they have until the end of January to do so, or risk being fined by HMRC.

If you’re one of the many self-employed people who started a business in the past tax year (from 6 April 2015 to 5 April 2016) and are facing your first year of self-assessment, you may be a little daunted by the process and worried that you might make mistakes with your tax return.

Don’t forget to register with HMRC

Before you can start your self-assessment, you have to make sure that HMRC is actually expecting a tax return from you – which means you have to register your business with HMRC first.

Remember that HMRC has to send you an activation code by post and if you don’t have this code, you can’t file your return. Therefore, it’s a good idea to register as soon as possible so that you’re guaranteed of getting your code well before the submission deadline.

Decide what your year-end date will be

All business owners have to prepare their accounts to a particular date every year, which is called your “year end date” or “accounting year end date”.

The simplest year end date to have in the UK is one that matches the tax year, which runs to 5 April each year. By concession, HMRC treats accounts that end on 31 March as matching the tax year.

You can choose whatever year end date you like, but be cautious when doing this. Having a year-end date that doesn’t match the tax year could potentially result in you paying tax twice on the same profits in the early years of your business (though in later years it means you may pay tax later than otherwise).

Remember that in your first year of business, you would have to report on your tax return your profit figure for when you started your business to 5 April 2016 – even if 5 April 2016 was not your year end.

If you want to keep things simple, it’s a good idea to stick to the tax year end – it’s much easier.

Don’t miss anything out in your accounts

When drawing up your first year of accounts you need to take into account all the transactions your business has had in that year. So if you started your business on 5 May 2015 and you choose the tax year end for your business’s accounting year end, you will need to include in your accounts all the transactions that happened between 5 May 2015 and 5 April 2016.

Remember to include all of the following information in your accounts:

• All business costs, including those you paid for yourself rather than from the business’s bank account. Remember this can include any costs that you incurred before your business actually started to trade – provided you spent the money no more than seven years before the start of your business and the cost could have been included if you had incurred it after the start of your business.
• Unless you are using the cash basis of accounting, you will need to include income that you invoiced – or which you’d done the work for – before 5 April 2016, but which your customers didn’t pay you for until after that date.
• Any large pieces of equipment (referred to as “capital assets”) that you bought for your business. These don’t go in as day-to-day running costs but you may be able to claim capital allowances on them.

Don’t forget other sources of income

If you have income from other sources as well as your business – for example if you have a job as well as being self-employed, if you earn interest on a bank account or if you rent out a property – then you will need to include these on your tax return too.

Collect all of the paperwork for this income, such as your forms P60 and P11D from your employer, or bank interest certificates. Remember, you need the paperwork that relates to the tax year 2015/16 – i.e. the tax year which ended on 5 April 2016.

Remember to file on time

Your tax return will need to be filed online to HMRC by 31 January 2017. If you file after that date – even by so much as a day – then you’ll be fined £100, and the fines increase if your return is more than three months late.

These fines apply even if you don’t have any extra tax to pay or if you have paid all your tax.

You can file your tax return via HMRC’s online portal.

Look for help if you’re unsure about your numbers

If you’re not 100 per cent confident about your tax calculations or how you’ve been managing your financial data through the year, it’s a good idea to enlist the help of a professional accountant to help you through the process by preparing or checking your tax return for you.

However, be warned that December and January tend to be the busiest months of the year for accountants and some of them may charge an extra premium to new clients who join them during this season.

Emily Coltman FCA is chief accountant to FreeAgent.