Corporate tax planning for the year ahead

The end of the tax year in April 2023 may seem a long way away, but it’s never too early to start planning to minimise your tax liabilities for this current year. There are also longer-term considerations that will affect your business for the 2023/24 tax year and beyond as the government moves towards removing individual accounting periods as the basis for taxation by aligning basis periods with the tax year.

However, the immediate focus is on reducing tax your liabilities and there are a number of important steps that any business liable to Corporation Tax can take. These include taking full advantage of different types of tax relief, considering the most tax-efficient way of extracting profits, maximising capital allowances and arranging the optimum time for disposals.

If your business is outside the scope of Corporation Tax, you may consider changing your business structure by incorporating to take advantage of the lower tax rate.

Change your business structure

Sole traders and partnerships are taxed on a different basis and pay a higher rate of tax. Incorporating your business and setting up a limited company will allow you to take advantage of the latest rate of Corporation Tax – currently 17 percent on profits.

This compares favourably with paying the marginal rate of Income Tax on profits and you can also claim a wider range of allowable expenditure.

Although you will still have to pay Income Tax on your earnings as a director of a limited company, you can gain further tax advantages by incorporating. For example, you could pay yourself a combination of salary and dividends. As dividends are taxed at a lower rate, this will reduce your tax bill and provide a more tax efficient method of remuneration compared with salary alone.

There are also other ways to take money out of the business as a director, including bonus payments, pension contributions, directors’ loans and private investments.

Claim all allowable business expenses

Profit for Corporation Tax is based on your income minus costs of doing business. Make sure you claim all allowable business expenses, including:

Cost of sales

• Costs of raw materials

• Operational costs

• Cost of buying products for resale

• Product distribution costs

• Marketing and promotional costs

• Discounts to retailers, wholesalers and distributors

Overheads

• 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

• Insurance premiums

• 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

Maximise capital allowances

You can claim capital allowances for purchasing a range of assets for your business, such as plant and machinery and many types of fixtures on your property. Generally, eligible equipment provides relief at 18 percent per year on the value of the asset as it reduces each year. You can also claim for the purchase of vehicles used exclusively for your business, although the rates of capital allowances differ.

Limited companies currently benefit from an Annual Investment Allowance (AIA), which was raised by the Chancellor temporarily from £200,000 to £1 million and will remain at the higher figure until March 31st 2023. The AIA enables your business to claim 100 percent of the cost of qualifying plant and machinery in the tax year you acquire it, which can reduce your tax bill and help you invest for growth.

The Chancellor also introduced a new super-deduction tax policy, which allows you to claim tax relief on 130 percent of an eligible asset’s full value between 1st April 2021 and 1st April 2023.

To maximise the Corporation Tax benefits from the higher allowances, make sure you make any qualifying purchases before the expiry date of 31st March.

Related: How to avoid VAT when buying a van for business

Minimise tax on asset disposals

When you dispose of an asset that was eligible for capital allowances, you will incur a Capital Gains Tax charge on the value of the disposal. As that will raise the amount of tax you pay in a given tax year, so it’s essential to plan the timing of the disposal carefully.

For example, if you already expect a large tax bill at the end of the current tax year, you can postpone the disposal until the beginning of the following year.

However, if you make a loss on the disposal of an asset, that can be used to reduce your Corporation Tax bill, so you may consider keeping the disposal in the current tax year.

Read More: Claiming loss relief on your opening year losses

Carry losses forward or backwards

If your business makes a trading loss in a tax year, you can use the loss to reduce your Corporation Tax bill in the current. Alternatively, if you don’t need to use the loss this tax year, you can carry it forward to reduce profits in future tax years.

Claim R&D allowances

If you carry out research and development, you can claim for a 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

If your business employs less than 500 people and has a turnover less than 100 million Euros, you can claim SME R&D relief, which allows you to deduct an extra 130 percent of your qualifying R&D costs from your yearly profit, as well as the normal 100 percent deduction – a deduction of 230 percent in total.

Large companies can claim a Research and Development Expenditure Credit (RDEC) for working on R&D projects. RDEC is a tax credit, equivalent to 13 percent of qualifying expenditure.

Offer alternative forms of remuneration

While any form of remuneration can reduce your Corporation Tax liability, some forms of remuneration are more efficient than others from both a personal and business perspective.

A combination of salary and dividend is tax efficient. Dividends below £2,000 are tax free; above that point they attract tax at the appropriate PAYE band.

Pension contributions can be deducted from your Corporation Tax liability. Directors can make contributions of up to £40,000 per year into their pension fund without paying tax.

Prepare for changes to the taxation period

In the tax year 2024/25, the basis period for taxation will change. Currently businesses are taxed on the profits incurred during their accounting year, which may not coincide with the tax year 1st April to 31st March. HMRC will remove that basis period and businesses will be taxed on profits incurred during the tax year.

To enable your business to make the change, there will be a transition period. In the tax year 2023/24 you will be liable to Corporation Tax on profits incurred in the 12 months from the end of your basis period ending in 2022/23. However, you will also pay tax on profits incurred during any transition period up to 5th April 2024.

From the tax year 2024/25, your Corporation Tax bill will be based on profits incurred during the tax year. This is likely to increase tax bills during the transition period, so this will require careful planning to minimise your liabilities.

Support from Accounts & Legal

This article has briefly outlined the main areas of your business where you can reduce your Corporation Tax or Capital Gains Tax liability in the current tax year, or in future years. However, if your tax affairs are more complex, you may find it useful to take professional advice.

We have accounting offices in London, Manchester and Brighton, and our accountants are highly experienced in personal and business tax issues and can help you to minimise your tax liability. Contact us on 0207 043 4000 or  info@accountsandlegal.co.uk to find out more, or get an instant accounting quote here.