UK Organizations should do intelligent tax planning and know the rules on how businesses can pay the correct amount of tax that they owe. At the same time, businesses can follow these simple tips to reduce their corporation tax.
1. Claim Every Expense
Try to claim every expense you make entirely for business use. Even £1 matters in the business. Record the little expense your clients make for their business work which would help to reduce your corporation tax and thus lead to lesser stress. Small expense recording like £3 bus tickets or a £2 pad of paper can be a hassle but over the course of a year those items will add up and later it will pay off in the corporation tax.
2. Company Mobile Phone
With the current scenario of working from home, staying connected virtually shot up to the priority. Companies considering giving corporate cell phones to their employees for business calls to consumers and clients. But the cost of the mobile devices your clients provide to their employees is an allowable tax-deductible expense that can help to reduce corporation tax. There are some conditions that need to be fulfilled for claiming without making the availability of a cell phone as Benefit in Kind (BIK).
- Firstly, the telephone must be in possession of the organization and should not belong to the worker. This means that they must return to the company when they leave the organization.
- Each employee can be equipped with only one working phone. No matter the employee is the director of the firm.
- Phone cannot be exchanged for a higher salary.
Finally, any contract with an employee for the mobile device must be taken under the company’s name, with the company paying the bill. And thus, it will be a good idea to ensure that all the employees understand that they must not exceed the contractual limit of using the phone.
3. Director Salaries
Business directors receive payments in the form of compensation & dividends. Receiving a paycheck can be an efficient way to lower corporate tax. HMRC recognizes compensation as a tax-deductible company cost for staff. Also, dividends are not tax-deductible and should only be paid from the income of the company.
4. Work From Home Allowances
HMRC allows businesses to claim some cost for using the personal space as the tax-deductible expense to reduce corporate tax.
There are two options for work from home allowances:
- Claim a flat rate of £6 per week (an allowance of £312 per year for the 2020/21 tax year & £208 for the previous year).
- Rent a room in your clients’ personal house to their limited company.
The income your clients get as rent from the limited company must be declared on your client’s personal tax returns.
5. Claim R&D Tax Relief
We hope you are not missing the tax reliefs for the innovations your clients are making.
If your clients are developing new or improved processes, products, or software then it is likely that you can reduce your corporation tax by around £25,000 for every £100,000 spent on innovating. Tax savings may also be available for research & development allowances where you have paid for research facilities or equipment.
Where the company is eligible to claim for R&D tax credits, some of the normal tax-deductible business expenses such as salaries, materials, software, etc. not only reduce the corporation tax bill, but a portion of it can be repaid to the company in the form of tax credits. It is strictly dependent on the size of the company and whether the company is making a profit or loss.
6. Claim Travel Mileage
There are several ways you can claim your mileage expenses to reduce your corporation tax but to a limit.If your clients are a small, limited company with few employees, you can advise your clients to run their own personal vehicles for business travel and can claim a fixed rate mileage expenses from the company. Alternatively, using a pool car, company car or a company van too can offer some tax relief to the company by means of capital allowances but they may attract other forms of BIK tax for both employee and company.
Where the employees or directors use their own personal vehicle for business use, they can claim up to 10,000 miles per year at a fixed rate of 45p per mile. Further to this limit, the fixed rates drop to 25p per mile.
Note: Only mileage for business purposes can be claimed and mileage for day-to-day commuting to your workplace cannot be claimed.
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