Nobody wants to pay tax, but it's a necessary burden to all of us. For some companies the prospect of having to pay Corporation Tax (in addition to every other tax) can be a dark shadow sitting at the end of the financial year. However, you can do things to lessen the blow.
Here are some of the best practices for managing your Corporation Tax bill and how commercial finance can help you.
What Is Your Corporation Tax?
There are two certainties in life death and taxes and no matter how successful your business is; making a profit is going to mean getting a Corporation Tax bill from HMRC.
This means two things: firstly it means understanding your tax liability and secondly; it means ensuring you have enough money to pay the bill.
In a nutshell Corporation Tax is charged on your company's profits, after your outgoings, tax relief and capital allowance have been taken into consideration.
If you weren't aware, Corporation Tax has changed since 2015-16 when 20% was taken fro the first £300,000, and 21.5% for the next £1,200,000 since 2016-17 that figure has been 20% across the board. (in fact the government has pledged to reduce this further, to 17% by 2020).
How To Reduce Your Corporation Tax Liability
In order to reduce your Corporation Tax burden (or at least minimise it, because you can't technically reduce what you are obliged, by law, to pay), you should be looking at how to best manage your company finances. This means planning well ahead making sure you claim allowable expenses and ensuring tax relief schemes are entered when and where applicable.
Everyone's business situation is a different one, so there may be specific schemes within your industry that make allowances for certain deductions.
However, there are usually some basic methods you can employ that ensure you are not paying more tax than you need to. These include your business expenses, pension contributions and capital allowances.
Claiming All Your Business Expenses
A business expense is one that used exclusively for your business, if you are unsure of what expenses you can claim, here is a list of what you can:
Business travel - This includes all your travel costs that are made when undertaking company business. This includes when working at a temporary workplace away from your office, i.e., working at a different sites (but makes up less than 40% of the total time you are working). This also includes the mileage, public transport and food expenses (subsistence). So always ensure that you keep your receipts.
Overnight accommodation - Travelling overnight to a temporary workplace or site, so long as costs are reasonable, can be claimed back. This will also include the food (subsistence) and travel costs you incur when doing so.
Subsistence - Working lunches and the food and drink you consume when you are either travelling on business, in overnight accommodation or working at a temporary workplace. Costs must be deemed reasonable though.
Entertainment - Every time you entertain, either a client or a potential client, you can claim for the costs of doing so. Unfortunately though, you cannot receive relief from Corporation Tax, despite it being a legitimate business expense. Your annual staff party IS allowed though, so long as the costs of doing so don't exceed £150 per employee.
Charity donations - When you make payments to a registered charity (from your company) you can claim relief from these payments off your Corporation Tax.
Child Care - As you are still an employee of your business you can even claim up to £243 per month in child care vouchers without being subject to additional Income Tax or National Insurance.
Using your home - You are even allowed to claim up to £4 per week when you use your home as an office. You can also allocate costs according to time used and the business tasks you have performed. Although this is a more complex method of working it out.
Company purchases - You should be claiming for every piece of equipment and machinery that you have purchased. So if you have a new piece of machinery that cost you £6,000 then you'll be paying an extra £1,200 in Corporation Tax if you haven't included it. This includes the office chairs and the Nespresso machine in the corner of your office. All these purchases add up.
Other expenses - You can even claim for things like special glasses you use only for work (i.e. toughened glass or safety eyewear). Office stationery, over the course of a year can be a huge expense, so ensure that all receipts for these are kept and added to your expenses. Work clothes (not including suits and ties) are included so long as they contain your company logo, safety gear and any uniforms you and your staff might be subject to wear.
Pay it early - If you are on top of your finances and your tax bills than you might be in a position to pay some of it early, or at least make early repayments (before its due) and you'll be surprised to learn that HMRC will refund you the interest for doing so.
Using Your Pension To Minimise Corporation Tax
Payments into your pension scheme can be an efficient way to reduce your Corporation Tax liability. If, for instance your company made a hefty profit then you can pay pension contributions to both your and other directors' schemes. Pension tax relief is currently restricted to £40,000 and there isn't any tax relief for pension contributions over that limit. Your pension contributions are taken off your company's profit and can save significant amounts of Corporation Tax. Ensure all payments into your company's pension scheme before the end of your financial year.
How Capital Allowance Works
You can get tax relief by utilising your capital allowance when buying certain kinds of equipment and machinery or if you invest in your building. The principal schemes are:
- Annual Investment Allowance: If you purchase business equipment (i.e., computers, machinery, tooling etc.) you might be able to set 100% of the against your current year's profits. Currently the amount of AIA you can claim is £25,000.
- Writing Down Allowance: If you currently hold assets like vehicles (business cars) or utility systems (heaters, water systems etc.) then you can claim capital allowance and deduct part of their value against your profits. (Be warned there are various different rates set against each type of WDA, so be sure to consult with your tax consultant).
- Enhanced Capital Allowance: You can also claim against your company profits if you are utilising certain environmentally beneficial equipment (solar panels etc.) and this also includes low emission vehicles.
- Research & Development Tax Relief: This is designed to help and encourage businesses to partake in R&D ventures. For instance if you are in the scientific or tech industry you can claim up to 150% of the costs off your profit margin.
Record-Keeping For Your Corporation Tax
It goes without saying that keeping hold of and maintaining all your expense receipts is vital. But better still is to keep a keen, monthly or weekly eye on all your costs and expenses. Record-keeping can be a lost art for some business owners, but for those that do, plenty of savings can be made against your tax liabilities.
Using Commercial Finance For Corporation Tax
Inevitably, there are times when your Corporation Tax can come as a surprise. In many circumstances HMRC will allow up to nine months from sending you a bill for you to pay it.
In these circumstances it can then be easy to miscalculate finances and find yourselves on the back foot when it comes to keeping up with payments.
Having commercial finance in place to mitigate these fears can allow you to pay HMRC without having to incur late payment penalties and for you to plan your finances for the year ahead.
Unexpected events can distort your finances and when they happen at a time when your Corporation Tax bill is due they can escalate quickly:
- Purchasing to fulfil large contracts
- Late paying customers
- Unexpected mechanical breakdowns
- Seasonal fluctuations
- Poor cash flow
- Bad debt.
It is often better to ensure lines of credit are open to you before you need it, therefore ensuring that you are ready for your worst case scenario, which always seems to happen just when your tax bills are due!
Be careful that you are not spending any more than you should when it comes to Corporation Tax. With proper planning and best practice, it is possible to reduce your tax liability.
However, if you are facing a shortfall in funds when your tax bill is due then you still have several commercial finance solutions available to you. Access Commercial Finance can help you with secured and unsecured business loans or invoice finance packages. We're here to help you identify funding options to suit any circumstance.