In the UK and the majority of other nations, limited corporations must pay corporation tax on their profits. According to the jurisdiction, it is typically computed as a proportion of the company’s profits. For the fiscal year 2021–2022, the corporate tax rate in the UK is now 19%. There are, nevertheless, legitimate techniques to lower or evade company tax. In this post, we’ll look at some of the most popular tactics used by businesses to reduce their tax obligations.
It’s critical to define who exactly is subject to corporate tax before discussing how to avoid it. The majority of nations, including the UK, base corporation tax on an organization’s earnings rather than its revenue. In other words, it’s the money that remains after a business has paid all of its legitimate business expenses, including wages, rent, and supplies. Therefore, if a business has a £1 million revenue but £800,000 in expenses, its taxable earnings would be £200,000, and it would pay corporation tax on those gains.
1. Benefit from tax breaks and allowances
Utilizing the different tax reliefs and allowances available to businesses is one of the most efficient ways to lower corporation tax. For instance, the UK government provides a variety of tax credits and deductions for eligible expenses for research and development (R&D) initiatives. The cost of capital assets like machinery and equipment can be deducted from taxable profits by corporations using capital allowances, which are similar to tax deductions. Utilize tax-effective structures
Utilizing tax-efficient structures, such as a holding company or group structure, can help decrease corporation tax. A firm can benefit from tax advantages like group relief, which enables losses in one company to be offset against earnings in another within the same group, by structuring their operation in this way. The assets of a group can also be held and managed by a holding company, and the income from those assets may be subject to different taxation from those of the operating companies.
As was previously noted, corporation tax is computed on a company’s profits after all permitted business expenses have been subtracted. Therefore, it’s critical for businesses to submit all of their allowable expenses. This covers any costs that are incurred entirely and exclusively for business-related purposes, such as salary, rent, travel, and equipment. 4. Take into account tax-efficient investments By contributing to tax-efficient programs like the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS), businesses can also lower their corporation tax obligations. These programs offer considerable tax benefits, including as income tax relief, capital gains tax relief, and inheritance tax benefits, to investors who invest in eligible enterprises.
In conclusion, there are a number of legal strategies to lower or avoid company tax, including using tax structures, tax-efficient investments, and taking use of tax breaks and exemptions. However, it’s crucial for businesses to get expert counsel and make sure they are adhering to all pertinent tax laws and regulations. In the end, it’s important to find the correct balance between reducing tax obligations and managing a successful, long-lasting firm.