Tax Planning Tips 2016/17

There are a number of ways that the profits of a company can be reduced along with the level of corporation tax payable

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-enrollment 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.

In this particular example:

  • There are three directors aged 55
  • The company has a healthy level of cash, and has calculated that it has the ability to spend in excess of £200,000 without disturbing its cash flow
  • All the directors have had pensions in place over the last four years, but only one has made a contribution in the current year (£10,000).

Company contributions made into each of the director’s personal pensions of £50,000 will reduce the profit of the company by £150,000 resulting in a corporation tax saving of £41,250 (assuming a corporation tax rate of 27.5 per cent)

In addition the directors will now have an additional £50,000 in their pensions and, as these have been paid directly, not as salary, the directors will have paid no income tax or National Insurance contributions on monies used to fund the pension contributions.

The director who has already made a contribution for the current tax year would need to utilize the carry forward provisions available. Simple but effective.

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 programmers
  • Animation programmers
  • 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.