Posted on: 02 Feb, 15
A guide to the allowances and reliefs available to help minimise your corporation tax
Limited companies and most unincorporated associations such as sports clubs and cooperatives have to pay corporation tax. This is a tax levied against the profits a company makes. It includes profits from:
Companies based in the UK pay corporation tax on profits from both the UK and abroad. Foreign companies with a UK branch or office have to pay tax on the profits from their UK activities.
The amount you have to pay depends on how much profit your company makes. At present there are 2 corporation tax rates:
The small profits rate: companies with profits of less than £300,000 pay corporation at tax 20%.
The main rate: companies that have a profit of more than £300,000 pay corporation tax at 21%.
There is also a marginal rate of 21.25% for companies with profits of between £300,000 and £1.5 million. Companies that fall into this category will be taxed:
From 1 April 2015 the small profits rate will be unified with the main rate into a single rate of 20%.
There are various opportunities for businesses to reduce their corporation tax bill. Some of these are only available to different sized companies or specific industries.
All businesses can deduct the costs of running the business from profits before tax. This includes salaries, office equipment and pension contributions. So it makes sense to keep careful records of expenditure throughout the year.
There are 2 schemes for claiming relief on R&D expenditure: SME Scheme: 225% on R&D costs. This means that for every £100 spent on R&D, corporation tax is reduced by £225.
There are specific rules to determine if a business is an SME for R&D relief.
Large Company Scheme: 130% on R&D costs
Projects that qualify for R&D relief must aim to improve knowledge or capability in science or technology by solving a scientific or technological uncertainty. They cannot just work on improving their own technology. The government has guidelines that define these terms within the context of R&D relief.
The company will have to provide evidence of how the definition of R&D applies to a project in order to claim the relief.
Costs that qualify for R&D relief:
But remember, you can only claim R&D relief if your business is liable for corporation tax.
Companies that make a profit from exploiting patented inventions may be able to benefit from the patent box. The patent box allows a 10% rate of corporation tax on profits earned after 1 April 2013.
To qualify for the reduction a company must:
There are also rules on the types of patents that qualify and types of income from patents that qualify.
Applying for patent box relief needs to be done within 2 years of the end of the accounting period in which the profits and income were earned.
Companies in the creative industries can claim a higher rate of corporate tax relief if they:
of certain films, television programmes, animation programmes or video games. In addition the film, TV programme or video game must pass a ‘cultural test’ administered by the British Film Institute to qualify for the relief.
Companies can claim relief on the transfer of assets to shareholders when they change from being a private limited company to a partnership owned business or a sole trader. Introduced in 2013, the relief will operate until 2018.
Trading losses can sometimes be offset against other profits to reduce the amount of corporation tax payable. For example, a company makes a loss from trading but makes a profit from renting out a building in the same accounting period.
Trading losses can be carried back against profits in the previous accounting period or carried forward and offset against future profits. The rules in this area are very strict to prevent tax evasion so seek advice before making a decision.
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