For many business owners, your personal wealth is inextricably linked to your business. Whilst the focus of this guide is on personal tax planning, we highlight key corporate tax considerations that may have an impact on your personal tax position.
The current rate of corporation tax is:
The main rate of CT will increase to 25% from 1 April 2023 for companies with profits in excess of £250,000.
A Small Profits Rate of 19% will be introduced from 1 April 2023 for companies with profits under £50,000.
These thresholds are reduced pro-rata where there are ‘associated’ companies i.e. if there are two associated companies, the main rate and small profits rate would apply to profits of £125,000 and £25,000 respectively.
From 1 April 2023, the concept of ‘associated companies’ is reintroduced in order to determine the rate of Corporation Tax applicable.
A company is associated with another company at a particular time if, at that time or at any other time within the preceding 12 months:
There are a number of factors to consider when reviewing the most appropriate and efficient method to extract profits from your limited company.
Tax Tip | Revisit the number of companies needed
For a number of years, the rate of Corporation Tax has been consistent across all companies and therefore owning/controlling multiple companies had relatively little impact on the CT liability. Consideration should be given as to whether it is now appropriate to reduce the number of companies required within a group or under common control.
Pension contributions are efficient for both the company and the employee.For the employee it is a tax-free benefit (but care is needed not to exceed the Annual Allowance or Lifetime Allowance). For the employer, the contribution will usually be fully tax deductible for Corporation Tax purpose in the year that the contribution is paid.
The advantages of a FIC are:
The basic structure of a FIC involves providing shares to family members. The FIC is then free to trade, make investments (e.g. rental property, investment portfolios) and generate profits from this.
FICs have increased in popularity over the last few years. Often they go by other names, but the principle is the same.
Capital Allowances are available to companies (and to unincorporated businesses including furnished holiday letting businesses) for capital expenditure.
AIA is currently £1m
Qualifying capital expenditure can be relieved in full in the accounting period in which it is incurred.
From 1 April 2021 until 31 March 2023, companies investing in qualifying new plant and machinery assets will be able to claim:
a 130% super-deduction capital allowance on qualifying plant and machinery investments.
a 50% first-year allowance for qualifying special rate assets.
SBA may be claimed on qualifying expenditure incurred.
To be able to claim SBA, it is necessary for the structure to be used for a qualifying activity, which includes:
any trades, professions and vocations.
a UK or overseas property business (except for residential and furnished holiday lettings).
managing the investments of a company.
mining, quarrying, fishing and other land-based trades such as running railways and toll roads.
The costs included within the SBA claim would be the acquisition costs of a structure or the construction costs of building the structure. The cost of the land should not be included within the claim.
The rate for the SBA is 3%. It is not possible to claim AIA on expenditure that qualifies for the SBA.
Tax Tip | Plan your expenditureThe timing of capital expenditure is important to ensure that you maximise, and ideally do not exceed, the available allowances.
Tax Tip | Patent Box electionIf your business qualifies for the Patent Box regime, you must make an election within specific deadlines, generally two years from the end of the relevant accounting period.
Research and Development (R&D) tax relief is an incentive available to UK limited companies which encourages investment and innovation. The relief can reduce a company’s tax liability or, if a company is not in profit, provide a payable cash refund. Research and Development tax relief for Small and Medium Enterprises (SMEs) currently provides an additional allowance of 130% (86% from 1 April 2023) of a company’s qualifying R+D expenditure. For large companies and other companies unable to utilise the SME scheme, a tax credit of 13% (20% from 1 April 2023) is given for a company’s qualifying R+D expenditure. Claims can be made retrospectively, but a claim can only be made within two years of the year end. Also from 1 April 2023: new claimants must advise HMRC of their intention to claim within six months of the year end; and the rate of tax credit for refunds for SMEs reduces from 14.5% to 10%.
Taking advantage of these reliefs can create funds which you can reinvest in your business. If you are a loss making business, in some cases you can surrender losses for a cash tax credit.
A company may be able to claim a number of enhanced tax reliefs on a range of expenditure, which H M Revenue and Customs are trying to encourage.
The patent box provisions can be used to reduce tax for activities that result in a patented innovation. Effectively, a 10% tax rate can be applied to all profits attributable to products, processes or royalties that carry on or include a qualifying patent.
There is a raft of tax reliefs available specifically for the creative sector, which includes: films, animation, high end TV programmes, video games, theatres, orchestras, museums and gallery exhibitions. Qualifying conditions vary and you should therefore review in the context of your company’s activities.
Land Remediation Relief provides an additional tax deduction of 50% for qualifying expenditure incurred by companies in cleaning up land acquired from a third party, in a contaminated state.
Qualifying expenditure includes the cost of establishing the level of contamination, removing the contamination or containing it so that the possibility of relevant harm is removed. There is, however, no relief if the remediation work is not carried out.
Land Remediation Relief is available for both capital and revenue expenditure. However, the company must elect, within two years of the end of the accounting period in which the expenditure is incurred, to treat qualifying capital expenditure as a deduction in computing taxable profits.
A company that makes a loss can surrender that part of the loss that is attributable to Land Remediation Relief in return for a cash payment (a tax credit) from the Government.
Loss relief has been temporarily enhanced for both companies and unincorporated businesses – subject to various conditions, trading losses may be carried back for up to three years for losses arising from 1 April 2020 to 31 March 2022 (2020/21 and 2021/22 tax years).
