Miguel Calabrese, MD Blue Rocket Accounting
Miguel is MD and Business Growth Manager at Blue Rocket Accounting. Out on the frontline with clients, Miguel helps business owners grow their profits, save time and keep more of their hard-earned money.
Today, Miguel writes for us on a topic lots of you have asked us questions about before - cutting your corporation tax bill! We're not accountants, so we thought we better bring in an expert to deal with the topic and in this piece, Miguel will talk about using profits to invest back into the company thus cutting your corporation tax bill while simultaneously growing your business. Over to you, Miguel.
If you’re paying corporation tax and business has been good, you could be using some of the profit to reinvest in your company, its sustained growth and future potential.
There are some legitimate tax-deductible expenses, such as marketing, purchasing new equipment and rewarding staff, which can be offset against your profits to reduce your corporation tax bill. Let’s talk about them.
What is corporation tax?
So let’s deal with the basics first.
Corporation tax is a tax that all limited companies pay to HMRC on profits that the business makes.
Business owners have to take responsibility for identifying the taxable profits they are making, report on this and then make the appropriate payment. HMRC must make certain that the right level of payment is made, so there is paperwork associated and that’s why most companies ask their accountant to take care of this for them.
An accountant will be able to identify all the business expenses that are tax deductible, and which can be offset against the profits to scale back the tax bill.
Business Expenses vs Tax Deductible Business Expenses
There is a difference between a business expense and a tax-deductible expense. Not all business expenses are tax deductible. In other words, some expenses you incur while running your business, are essentially “added back on” when filing your company tax return and and the money you spend on those expenses will still count as profit.
An often-misunderstood example of a non-tax-deductible business expense is client entertainment.
But if you’re spending money in certain ways to grow the business, for instance to increase your pension pot or buy equipment, you will effectively be reducing your corporation tax bill.
5 Tax Deductible Expenses to Reduce Your Corporation Tax Bill
Here are some of the ways you could invest in your business, whilst reducing your corporation tax bill:
Marketing
Marketing is a tax deductible expense. For more businesses it’s also absolutely essential to driving sales.
Beyond the obvious marketing expenses (like ad spend, agency support, consultants and so forth) you could also look at things like branded gifts.
Creating some gifts for clients that have conspicuous branding or feature an advert for your business are tax deductible. Gifts must not include food, drink, tobacco or tokens or vouchers exchangeable for those goods. It must also not be the equivalent of more than £50 per person per year.
Branded merchandise like pens or mugs will help strengthen a relationship and will also provide a marketing opportunity when they’re used offsite or in meetings with external parties.
Pension contributions
You may be able to increase your own pension contributions, but did you know that making employer contributions into a pension scheme can also provide savings for both employee and employer?
This is also an excellent way to improve the benefits package that you are offering to your staff and this in turn could contribute to improved staff retention.
Charitable donations
It’s always good to give back, isn’t it?
Charities have been particularly badly impacted by the changes caused by the pandemic in the last year. If you’re in a position to make a charitable contribution, talk to your accountant about how you can increase the donation, by using Gift Aid for example, which is also tax deductible.
Equipment
The equipment you need to run your business is often a tax deductible expense. So if you need a laptop upgrade or some new equipment, this is often an expense that will reduce your taxable profit totals.
Check with your accountant, because the amount of relief available can be affected by your business year end, but there is a 100% Annual Investment Allowance of up to £1million on most types of equipment.
Staff rewards
The past year or so has been tough on everyone and good employers are doing all they can to support their staff.
There are a number of options when it comes to rewarding your team, including:
- One mobile phone can be provided per employee
- Some forms of transport to and from work, such as bus or train fares, can be subsidised
- Providing workplace nurseries and crèches
- Sporting and recreational facilities
- Health checks
- Car parking
- Paying relocation expenses
- Team parties – Christmas or summer parties or celebrations, up to £150 per employee
- Making pool cars available for your team to use for business purposes
- Incentivising your team by paying then an extra 5p a mile for using their own car to take colleagues on the same business trip
- Providing company bicycles or incentivising employees to use their bikes for business journeys
Meeting with your accountant before your year-end is a good time to evaluate profit levels and assess how much money can be reinvested back into the business. What are you waiting for?
You can find out more about Miguel Calabrese and Blue Rocket Accounting on the website.
