Do you want to learn how to reduce corporation tax liabilities? Then read on.
If your company is based in the UK, you will be liable to paying corporation tax. This means that you must pay the government a fee. How much you give depends on the organisation’s taxable profits, which will result in you paying either the lower or upper rate, or Marginal Relief.
All limited companies are subject to corporate tax including foreign-based firms with a permanent place of business in the UK. Everyone from members’ clubs, social clubs, associations and charities are required to pay it. If you are accountable but don’t meet HMRC’s deadlines, you will face a penalty.
There has been a lot of news recently on big businesses like Google who are not paying much tax, despite making billions of pounds in profits. MPs dubbed the search engine giant “devious, calculating and unethical” for paying £6 million in UK corporation tax in 2011, even though it earned more than £3 billion in advertising revenues. So how are they getting away with it? Here are 5 top tips to easing your corporation tax liabilities:
5 Top Tips to Reduce Small Business Corporation Tax Liabilities
- Where are your activities based?
It is acknowledged that Google has taken advantage of the Irish tax haven.Matt Brittin, Google’s head of operations in Northern Europe, upholds that the firm is doing nothing wrong because all business takes place in Dublin.
If a company isn’t based in the UK but operates in the UK, you only have to pay corporation tax on any taxable profits arising from UK activities. Despite the negativity, tax shelters are a legitimate way of deferring tax liability.
- Are you active?
A business is only subject to paying corporation tax if it is trading or receiving income. If it is dormant and not active, it is not viable. Has your company seized trading at any point? If it has, you should not have paid tax in this timeframe.
- Is the company set-up tax proficient?
There are various types of business structure and some are more tax efficient than others, so you need to find one that’s best for you. If you are self-employed, a limited company really is the most effective structure due to flexibility, security and it can reduce the impact of the 50% income tax rate.
- Are you paid a salary or dividend?
Limited companies have a completely separate legal entity from the owners as the profits and assets belong to the firm, not you as the shareholder. Therefore, any profits that are made are withdrawn either as dividends or as a salary to the employees; and the tax payable differ for each method used.
Profits extracted by dividends are not subject to corporation tax purposes but instead, are treated as a distribution of profits after taxation. A salary payment, which includes National Insurance contributions, is an allowable deduction of the company’s taxable profit and reduces the corporation tax payable.
Payment by dividend can also improve cash flow but you need to ensure that all shareholders of the same class of shares are paid; and they should all be paid as a distribution of profits. Please note that by using this method of payment, you will forfeit your benefits of accessing a pension fund as well as a sickness insurance scheme.
- Do you carry out research and product development (R&D)?
Many firms mistakenly think that they don’t qualify for this, but if you do, you could save a fortune. Since April 2012, companies that are involved in R&D receive up to 225% relief against corporation tax. If your work in the present and future (as well as the last two years) qualifies, the amount of tax deduction you could receive is significant.
So there you have five ways to reduce your corporation tax liabilities. Use the savings to improve your business, invest in new technology, hire new staff and make your business bigger and better than ever before!
Author’s Bio: This article was written by KeithTullys at Real Business Rescue, the leading experts in business recovery. The qualified, reputable insolvency practitioners offer impartial, professional advice for all businesses.