Corporation tax planning – November 2019

As we postpone Brexit yet further and are thrown into more political uncertainty, good tax planning can provide some consistency and certainty.
Maria Kitt focuses on topical Corporation tax planning [November 2019 ]

Move to 17%

Around two million trading companies in the UK will be familiar with paying corporation tax at 19% on any company profits.

Directors of those companies also know how that percentage can eat into those profits when the time comes to extract them.

The good news for them, and profit-making companies, is that the rate of corporation tax is set to fall from 19% to 17% from 1 April 2020.

Whether or not that comes to fruition after a year of extreme political upheaval, including the cancellation of Budget 2019, remains to be seen.

But last year alone, corporation tax netted the Treasury £55.1 billion – more than enough to cover Boris Johnson’s £33.1bn Brexit divorce bill.

While the 2018/19 figure represented a 2% rise on the previous year, it also increased for the sixth successive year.

With that in mind, what can you do to ensure you minimise your corporation tax bill and keep more of your company’s hard-earned profits?

Choosing the right business structure

According to Companies House, 672,980 companies incorporated in 2018/19 – an increase of 8.5% on the previous year and the highest number of annual incorporations since the depth of the recession in 2009/10.

More than a third (35%) of those new companies were aged between one and four, making the move from sole trader or partnership.

The lower rate of corporation tax (19% in 2019/20, reducing to 17% in 2020/21) often makes incorporating more appealing than paying a marginal rate of income tax.

Residential landlords, for example, are benefitting from incorporating as the phased reduction of mortgage interest relief does not apply to companies.

Utilise tax reliefs

Corporation tax bills can be reduced through tax planning and identifying reliefs to which your company might be entitled.

Research and development (R&D) relief is available for both smaller and larger companies that work in innovative projects within science or technology.

Smaller companies with less than 500 staff, a balance sheet of less than €86 million and turnover of less than €100m may be eligible for SME R&D relief.

This enables them to subtract 130% of their qualifying costs from their annual profits on top of a basic 100% deduction (230% in total).

Larger companies that carry out R&D projects or subcontracting SMEs may qualify for the R&D expenditure credit.

As ever we are happy to help and advise on this important relief.