Some proven ways to reduce Corporation Tax

The recent rise in the basic rate of Corporation Tax to 25% in the UK has heightened the tax obligations for all businesses. Now more than ever, companies are exploring methods to minimize their Corporation Tax responsibilities and ensure they pay only what is necessary.

Thankfully, there exist numerous tried-and-tested strategies that you can explore to mitigate your Corporation Tax expenses effectively.

1. Capital Allowances – tax relief on depreciation of assets and equipment

Capital Allowances serve as the means through which tax relief is garnered for the depreciation of assets and equipment. It's crucial to maximize these allowances wherever feasible, and careful consideration of the timing of future expenditure can enhance tax savings.

Companies ought to optimize their utilization of the Annual Investment Allowance, which presently provides full tax relief in the year of asset and equipment acquisition, up to £1 million.

2. Additional relief for capital expenditure

Companies, unlike unincorporated businesses, can enjoy full tax relief for capital expenditure.

For most qualifying plant and machinery, companies have the opportunity to claim a deduction of 100% of the asset's cost, resulting in a tax saving of up to 25%. This relief proves particularly advantageous for companies that fully utilize their £1 million Annual Investment Allowance.

Assets categorized as 'special rate' assets for capital allowances, typically encompassing qualifying expenditure integral to buildings, qualify for a 50% claim in the year of expenditure (providing tax relief of up to 12.5%), as opposed to the standard 6%.

Regarding the specifics, there are regulations governing the treatment of sale proceeds for assets benefiting from this relief; eligible assets must be new and unused, with standard exclusions applying to items such as cars. However, existing rules permit a 100% relief claim for zero-emission cars.

When making claims, it's essential to optimize the use of the Annual Investment Allowance for special rate assets and leverage first-year allowances for other eligible expenditures.

3. Claim R&D Tax Relief

R&D tax relief presents companies with the opportunity to secure substantial tax savings for their innovative endeavors. Unfortunately, these opportunities are frequently overlooked, as business owners often overestimate the level of innovation required to qualify.

Projects eligible for R&D tax relief encompass those aimed at achieving a significant advancement in science or technology. Therefore, if a company is investing in activities such as modifying manufacturing processes, developing customized software, or enhancing existing products or creating new ones, there may be scope for a claim.

Eligible companies can obtain tax relief on qualifying expenditures by either reducing taxable profits or generating (or increasing) tax losses, which can be surrendered to HMRC in exchange for cash repayment.

The available relief is quite generous; for instance, a SME incurring £100,000 of qualifying costs could potentially save approximately an additional £21,000 in tax. Moreover, claims can be retroactively applied for up to two financial years, making first-time claimants especially well-positioned to benefit.

Large companies can make claims under the R&D Expenditure Credit (RDEC) scheme, which offers a 15% repayable credit post-tax for every £1 spent.

4. Pay a lower Corporation Tax rate of 10% by claiming Patent Box tax relief

By claiming Patent Box tax relief, companies can benefit from a reduced Corporation Tax rate of 10%. This incentive is designed to reward UK companies that innovate and develop new patented inventions. If a company generates income from patented products or processes, it may qualify for a lower effective Corporation Tax rate of 10% on profits derived specifically from those patents. This rate is just over half of the standard tax rate.