For businesses operating in the United Kingdom, navigating the complex landscape of corporate taxation is crucial for maintaining profitability and competitiveness. Strategic tax planning plays a pivotal role in optimising a company’s tax liability and ensuring compliance with the ever-evolving tax laws and regulations.
As of April 2023, the main rate of Corporation Tax has increased from 19% to 25%, applicable to companies with taxable profits above £250,000. To support smaller enterprises, a Small Profits Rate (SPR) of 19% has been introduced for companies with profits of £50,000 or below.
This article explores various corporate tax planning strategies specifically tailored for UK clients to help them make informed financial decisions and enhance their financial performance.
Strategies for Corporate Tax Planning
1. Utilising Tax Relief and Incentives
The UK government offers various tax relief and incentives designed to support business growth and investment. Companies can take advantage of these schemes to reduce their tax burden while promoting activities that benefit the economy.
Below are some reliefs you might be eligible for:
R&D Relief
A small or medium-sized company that qualifies for Research and Development (R&D) tax relief can benefit from an enhanced deduction of 130% of the incurred R&D expenditure when calculating its taxable total profits.
In effect, this means the company can claim a total deduction of 230% for the R&D expenditure when arriving at the adjusted profits for tax purposes. This consists of the standard 100% deduction allowed for R&D expenditure under the usual deduction rules and an additional 130% deduction specifically applicable to ‘qualifying R&D expenditure’ falling within certain defined categories.Large companies, which do not meet the SME criteria, can claim a Research and Development Expenditure Credit (RDEC), equivalent to 13% of their qualifying R&D expenditure. The RDEC is treated as a taxable receipt in calculating trade profits for the accounting period and is credited against the company’s corporation tax liability.
If the RDEC exceeds the corporation tax liability, the company may receive a cash repayment for the unrelieved amount from HMRC, calculated based on specific rules. Any unrelieved RDEC is carried forward and treated as a credit in the subsequent accounting period.
Group Relief
Group relief enables the transfer of losses within a 75% group, where one company is a 75% subsidiary of the other or both are 75% subsidiaries of a third company.
The maximum amount of losses that can be surrendered is the lower of the current period qualifying losses of the surrendering company and the available taxable total profits of the claimant company for the corresponding accounting period. The claimant company can use the surrendered losses to offset its own taxable total profits. Brought forward losses may also be surrendered for group relief.
2. Optimal Capital Structure
A well-considered capital structure can have a profound impact on a company’s tax position. By balancing debt and equity financing, businesses can potentially optimise their tax deductions on interest expenses, capital allowances, and dividends. However, it is essential to strike a careful balance to avoid excessive leverage, which could lead to financial instability.
3. Loss Utilisation
Tax losses incurred by a company can often be carried forward to offset against future profits, reducing tax liability in subsequent years. Understanding the rules and limitations related to loss utilisation can help companies plan their finances effectively during profitable and loss-making periods.
Below are some reliefs that might interest you.
Relief for Trading Loss
Trading losses can significantly impact a company’s tax liability, and understanding the various options for utilising these losses is crucial for effective tax planning.
Trading Loss Utilisation
When a company incurs a trading loss, it has three options for using it. The first option is to carry the loss forward against total profits in subsequent years.
The second option involves offsetting the current year’s loss against total profits of the same accounting period and then carrying any unrelieved loss forward.
The third option also includes offsetting the current year’s loss against total profits of the same accounting period, followed by carrying the remaining unrelieved loss back against total profits of the previous 12 months/three years and, if any loss remains, carrying it forward.
Temporary Extension of Carry Back Relief
A temporary extension of carry back relief allows losses incurred between 1 April 2020 and 31 March 2022 to be carried back three years instead of 12 months, up to a £2 million cap. It is essential to claim loss relief at the highest tax rate possible and consider the cash flow advantage of reducing current corporation tax payable.
Terminal Loss Relief
Terminal loss relief permits carrying back the trading loss of the final 12 months of trade against total profits of the 36 months before the loss-making period, offering additional tax-saving opportunities for businesses.
Relief for UK property Business Losses
In the UK, losses incurred from a property business must be set off against total profits of the current period and carry back claims are not permitted. Any remaining excess UK property business losses can be carried forward to offset against future total profits.
Relief for Overseas Business Losses
When you have losses in your business related to properties in other countries, these losses are combined with the profits from those same properties. You can’t use these losses to reduce your taxes in the current year or apply them to previous years. Instead, you can use these losses to lower your taxes in the future when your overseas property business makes profits.
It’s important to note that these losses don’t have the usual restrictions like being limited to only 50% or having specific deduction allowances. You can carry these losses forward without any restrictions and use them to reduce taxes in the future.
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Relief for Non Trading Loan Relationship
Concerning non-trading loan relationship deficits, if non-trading debits exceed non-trading credits, loss relief is available for the resulting deficit.
These deficits from a non-trading loan relationship can be applied in two ways:
- First, set against total profits in the loss-making accounting period, or
- Second, carried back 12 months and applied against non-trading profits (LR)
The claims can be made in any order and for any amount, not requiring full utilisation. Unused non-trading (LR) deficits are carried forward and can be set against future total profits as well deficit.
4. Dividend Planning
For owner-managed businesses, strategic dividend planning can lead to tax efficiencies. By considering the timing and distribution of dividends, business owners can minimise the overall tax burden and ensure compliance with dividend tax rates.
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5. Capital Allowances
Capital allowances are deductions that businesses can claim on qualifying capital expenditure, such as machinery and equipment. Understanding the different types of capital allowances and their associated rates can help businesses make informed decisions about investments and claim available tax relief.
6. Location and Entity Structure
The geographical location of a company’s operations and its legal entity structure can significantly impact its tax position. Certain regions or structures may offer tax advantages, such as tax incentives or lower tax rates, making it essential to consider these factors when expanding or restructuring a business.
7. Relying on Professional Advice
Navigating the complexities of corporate tax planning in the UK requires expertise in tax law and regulations. Engaging a qualified tax advisor or accountant is highly recommended to develop tailored tax strategies and ensure compliance with relevant laws.
Conclusion
Corporate tax planning is an indispensable aspect of financial management for UK businesses. By adopting effective tax planning strategies, companies can optimise their tax liabilities, enhance profitability, and maintain a competitive edge. Staying informed about the latest changes in tax legislation and seeking professional advice when needed are essential practices for successful tax planning in the dynamic UK business environment.
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