Companies – tax saving opportunities

If you run a company, knowing your tax liabilities and becoming more tax efficient can save you a lot of money and can make your company more profitable.

To utilise all company tax saving opportunities, you should hire a professional accountant to advise you on making the most of tax incentives on offer. Whether it’s savings on corporation tax, capital gains tax or keeping on top of ever-changing tax legislation to ensure you claim any related tax relief, a professional tax advisor will undoubtedly save you money.

In this blog, I look at just some of the areas where companies can make tax savings or become more tax efficient.

Claim expenses

When you are running a business it’s important to gain an understanding of business expenses that you can claim for in your business as this can save corporation tax.

There are many areas of expenses that a business can claim for (too many to include in one blog). You can download our comprehensive guide to limited company expenses here.

All expenses you claim must be incurred ‘wholly and exclusively’ for the purposes of running the business to be allowable for tax purposes.

If you’re not sure what expenses are tax allowable, then speak to our expert team as dns accountants to ensure you’re claiming everything you can or download our expenses guide.

Capital allowances

Capital allowances are a type of tax relief for businesses. They let you deduct some or all the value of an item from your profits before you pay tax.

You can claim capital allowances on plant and machinery:

• equipment
• machinery
• business vehicles, for example vans, lorries or business cars

If you’re a sole trader or partnership and have an income of £150,000 or less a year, you may be able to use a simpler system called cash basis instead.

The capital gains tax annual exemption will fall to £6,000 for disposals on or after 6 April 2023 and further reduce the exemption to £3,000 for disposals on or after 6 April 2024. It may be worth trying to make disposals before the end of the 22/23 tax year.

Types of capital allowances for plant and machinery

You can claim different amounts, depending on which capital allowance you use.

The capital allowances (also known as plant and machinery allowances) are:

• Annual Investment Allowance (AIA)

  Single companies (irrespective of size) can claim an Annual Investment Allowance (AIA). The Annual Investment Allowance provides 100% relief on expenditure on plant and machinery (excluding cars). The current amount of AIA is £1,000,000.

• Replacement for the super-deduction or 50% special rate first year allowance

  To help maintain business investment levels, the Chancellor announced in the Spring Budget 2023, the replacement for the capital allowance super deduction which expires on 31 March. The new scheme will be as follows:

• Full Expensing (FE)

  From 1 April 2023 to 31 March 2026, businesses can deduct 100% of the cost of certain plant and machinery from their profit before tax. The Chancellor expressed that his hope is to be to make full expensing permanent in the future.

• First Year Allowance (FYA)

  This allows companies deduct 50% of the cost of other plant and machinery, known as special rate assets, from their profits during the year of purchase. This includes long life assets such as solar panels and thermal insulation on buildings. This scheme has also been extended for three years until 31 March 2026. For each year following the first year, 6% of the remaining cost will be written off via Writing Down Allowances (WDAs).

• Writing down allowances

  Where qualifying expenditure on plant and machinery is more than the AIA limit, you may be eligible for writing down allowance (WDA) of 18%. Where the capital expenditure is incurred on integral features the WDA is 6%.

Some things to note on these allowances: If an item qualifies for more than one capital allowance, you can choose which one to use. Groups of companies have to share the allowance.

Consideration should also be given to the timing of capital expenditure on which capital allowances are available to obtain the optimum reliefs. There is legislation and commercial factors that you need to consider around the timing of your capital expenditure to ensure maximum tax efficiency, seek advice from a professional advisor.

Advancing expenditure

Expenditure incurred before the company’s accounts year end may reduce the current year’s tax liability.

In situations where expenditure is planned for early in the next accounting year, the decision to bring forward this expenditure by just a few weeks can advance the related tax relief by a full 12 months.

Planning of disposals

Consideration should be given to the timing of any chargeable disposals to minimise the tax liability. This could be achieved by accelerating or delaying sales and the availability of losses or the feasibility of rollover relief (see below) should also be considered.

Rollover relief

Business Asset Rollover Relief means you will not pay any tax until you sell the new asset. You may then need to pay tax on the gain from the original asset. You can also claim: provisional relief if you’re planning to buy new assets with your proceeds but have not done yet.

Purchase of new assets

It may be possible to avoid a capital gain being charged to tax if the sale proceeds are reinvested in a replacement asset.

The replacement asset must be acquired in the four-year period beginning one year before the disposal, and only certain trading tangible assets qualify for relief.

Trading losses

Companies incurring trading losses have three main options to consider in utilising these losses:

• they can be set against any other income (for example bank interest) or capital gains arising in the current year.
• they can be carried back for up to one year and set against total profits.
• they can be carried forward and set against profits arising from different types of income in future years.

There is a restriction on the use of carry forward losses where a company’s or group’s losses are in excess of £5 million. Profits cannot be reduced by more than 50% by brought forward losses. Losses that have arisen at any time are subject to these restrictions.

Corporation tax

One of the biggest changes in April 2023 is the Corporation Tax increase from 1 April 2023. For companies with profits of less than £50,000, the rate remains at 19%. For businesses whose taxable profits exceed £250,000, the rate will increase to 25%. For companies in between there will be a sliding scale of rates.

Companies with taxable profits between £50,000 and £250,000 will pay tax at the 25% rate, but this will be reduced by a marginal relief meaning CT rates of between 19% and 25%.

Find out more about Corporation Tax rates in 2023/24 here.

Tax saving tips to reduce Corporation Tax

The key to making sure you pay no more Corporation Tax than you have to is to claim every allowable deduction and expense to give an accurate picture of your profits.

Here are some areas to consider to lower your Corporation Tax bill.

1. Claim R&D Tax Relief
2. Claim Patent Box Tax Relief
3. Invest in plant and machinery (P&M)
4. Claim capital allowances on property
5. Claim all business expenses
6. Make pension contributions
7. Claim business mileage
8. Claim work from home allowance
9. Offer share schemes to employees
10. Claim all available loss reliefs
11. Subscriptions and training costs
12. Pay for a staff party or event

R&D tax relief

Another element to consider is whether your company qualifies for R&D tax relief.

Research & Development (R&D) tax relief is an incentive available to UK limited companies which encourages investment in innovation. R&D tax credits can reduce a company’s tax liability, or, if a company isn’t in profit, provide a payable cash refund.

The relief is geared towards businesses that can demonstrate they’re making ’appreciable improvements’ or overcoming technological/scientific uncertainties. R&D tax reliefs provide a 130% uplift on qualifying costs.

The Research and Development expenditure Credit (RDEC) rate will increase from 13% to 20% for businesses undertaking Research and Development (R&D) expenditure after April 1, 2023, however the small and medium-sized companies (SME) extra deduction will reduce from 130% to 86% and the SME credit rate would decrease from 14.5% to 10%.

R&D tax relief expansion 2023

There are three major changes to the R&D tax relief legislation which will take effect from 1 April 2023:

1. The R&D qualifying expenditure will now include data and cloud computing.
2. A potential restriction on the inclusion of costs incurred outside the UK for UK R&D claims.
3. An expansion of targeted anti-avoidance measures to counter exploitation of the R&D tax relief regime.
4. A new R&D scheme will operate for 20,000 R&D intensive SMEs in the UK from 1 April 2023. This will apply to companies where its qualifying R&D expenditure is worth 40% or more of its total expenditure.

There are also changes for some sectors that claim Audio Visual Tax Relief, with the introduction of expenditure credit at a rate of 34% for film, high end television and video games and 39% for the animation and childrens TV sectors. It was also confirmed that the qualifying threshold for high end television at £1m would be maintained.

Extracting profits from the business

For many business owners, their corporate profits are inextricably linked to their personal wealth. Whilst profit extraction is more an area of personal tax planning, there are several areas to look at when reviewing the most appropriate method to get company profits extracted tax efficiently. These areas will produce tax savings and reduce your tax liability:

• Corporation Tax rates.
• Personal tax rates.
• Utilisation of spouse’s personal allowances.
• Dividend Allowance.
• Overall levels of personal and household income.
• Personal pension contributions.
• Employment Allowance.
• Involvement in Research and Development Activity.
• Pre-planning your exit strategy.

Summary

Tax saving opportunities often need to be considered prior to the year end of the company or prior to the tax year end of the individuals who are shareholders or directors of the company.

Due to the ever-changing tax legislation and commercial factors affecting your company, it is advisable to carry out an annual review of your company’s tax position.

Pre year-end tax planning is important as the current year’s results can normally be predicted with some accuracy and time still exists to carry out any appropriate action. Advance planning may produce tax savings.

Here at dns accountants, we help and advise hundreds of companies on how to reduce tax liabilities in both the areas of corporation tax and personal tax as well.

For help and advice on how your company can make tax savings or any other tax advice, contact our team on 03300 886 686, or email on enquiry@dnsaccountants.co.uk.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.