Corporation Tax in the UK is a corporate tax levied on the annual profits made by UK resident companies and branches of overseas companies. The UK Corporation Tax rate is currently 25% for all limited companies. The 25% main rate is payable by companies with taxable profits above £250,000. A small profits rate is payable for companies with profits of £50,000 or below, meaning they will pay 19%. Companies with taxable profits between £50,000 and £250,000 will pay the main rate reduced by a marginal relief providing a gradual increase in the average Corporation Tax rate. However, the calculations for marginal relief produces an effective marginal corporation tax rate of 26.5% for profits between £50,000 and £250,000. These marginal rates of £50,000 and £250,000 are divided by the number of associated companies meaning groups will have lower limits depending on the size of the group.
For companies wishing to mitigate their corporation tax liability there are a number of planning points to consider:
Capital Allowances on asset spend
Where a company incurs capital expenditure on assets that would otherwise qualify for capital allowances (such as most loose plant and machinery, furnishings, manufacturing equipment, IT equipment, capital investment on software and some building fixtures) it is entitled to claim a first year allowance and take a 100% in year deduction in respect of the amount of expenditure. This provides an opportunity to plan capital expenditure to reduce corporation tax exposure.
A 3% structures and buildings allowance (SBA) is available in the UK for expenditure on the purchase, construction or renovation of non-residential buildings and structures (where normal capital allowances above do not apply). Before undertaking a project, planning is important to make sure capital expenditure on buildings can fall within the relief.
R&D and patent box
Research and development tax credits can provide large corporation tax savings (and sometimes tax refunds) when claimed. They apply to companies that undertake a project that seeks to achieve an advance in science or technologies. Many industries can claim and it is worth exploring projects your company undertakes to see if R&D tax credits can apply and be claimed. Claiming R&D can provide a corporation tax saving of between 15% and 26% of expenditure incurred on R&D.
The UK Patent Box scheme is available to companies earning profits from goods and/or services that have been patented in the UK or with the European Patent Office. It takes the form of an effective tax rate at 10% of the relevant profits compared to the UK’s usual 25% corporation tax rate which is a large tax saving for companies. The R&D regime and Patent Box regime tend to work alongside each other to incentivise and support the full innovation lifecycle of a UK business. If your company holds patents or could apply for patents, do contact us to see if you can access this valuable tax relief.
Interest costs
The UK corporate tax regime has various clauses that restrict the amount of interest a company can offset to save corporation tax. This includes excess interest restriction rules, anti-hybrid rules, unallowable purpose rules, transfer pricing rules and the corporate interest restriction rules. The corporation interest restriction rules limit the deductibility of interest in a company or group to £2m or to a level that corresponds to UK activity considering the amount of borrowing and interest ratios. The rules can be complex and it is important to plan the interest deductibility when planning corporation tax exposure, especially with inter-group loans.
Remuneration planning
There are a number of areas that can help extract funds from companies in a tax efficient manner. With Income Tax and National Insurance rates as high as a combined 47%+, it is important to regularly review the most tax efficient way for a business owner to be remunerated. Contributions to pension schemes are an extremely tax-efficient method of extracting funds from a company. They are largely tax-free in the hands of the pension scheme and are tax-deductible for the company. Tax free or low tax benefits can be provided to directors and staff in a tax efficient manner such as electric cars and certain equipment. The key is always to put a plan in place to make sure remuneration packages and paying profits to shareholders are as tax efficient as possible. Such plans can also help with the cash flow of tax payments.
Optimising your company/group structure
A review can be undertaken to establish a business’s most tax-efficient structure, including considering shareholders ultimate aim. Certain group structures with a holding company can achieve legal separation to protect assets whilst retaining the tax benefits of operating within a group of companies. It may also be possible to set up a group structure to allow tax free business sales in the future. Planning for the future and making sure your business structure meets those plans is increasingly important to access tax reliefs available.
Share incentives to attract and retain employees
For many businesses, it is important to incentivise and retain key employees to maximise business performance and align their interests with the shareholders to optimise the eventual sale price. This can be done using share options and other incentives. For example, an EMI scheme is a HMRC-approved employee share scheme. It is available to most SME trading companies. It allows employers to tax efficiently and enable key employees to acquire shares in the future (via share options) that can be dependent on performance and other criteria (such as the company being sold). The benefit of this is that the employee knows they can obtain shares in the future if they stay with the company and perform, and the business owner knows they won’t have to give up any equity unless the employee stays and performs and/or the business is sold. These can be a useful way of allowing key employees to share in a sale of the company in a tax-efficient manner for all concerned.
Further information on share options can be found here.
These are a number of corporate tax reliefs and planning points that can be considered to lower corporation tax exposure. There are other reliefs not mentioned may apply to your circumstances.
If you would like to discuss your company’s tax planning in more detail please contact Ian Timms, our Tax Partner, itimms@critchleys.co.uk
Critchleys Clients: If you have specific questions, don't hesitate to get in touch with your Critchleys contact directly.