Chris Hicks, Corporate Services Partner at Francis Clark LLP, says there are many ways to reduce corporation tax and even obtain credits

Cost reduction is a holy grail for all businesses, particularly in recessionary times.   So if your company pays corporation tax, are you sure you’re reducing that bill to the minimum?

And if your company has made, or is making, a loss, did you know you could be entitled to cash back from HM Revenue & Customs (HMRC) in the form of corporation tax credits?

A number of valuable relief and credit schemes are available but many businesses remain unaware either of their existence or of the full potential benefits.

Annual investment allowance (AIA). Last month’s budget doubled the AIA limit from £50,000. This means that the first £100,000 spent on plant and machinery in any one year from April 1st 2010 will qualify for 100% tax relief. AIA applies to most types of plant and machinery, including office equipment, fixtures and fittings. With corporation tax for smaller companies at 21%, it means that if you spend £100,000 on qualifying equipment in a year, your tax bill can be cut by £21,000. The equipment will effectively cost you £79,000.

Loss relief. A company that makes a loss in an accounting period can carry that loss back to relieve profits of the previous 12 months.  In addition, a company that has made, or will make, a loss during an accounting period that ends in the period from November 24th 2008 to November 23rd 2010 is eligible to carry back a further £50,000 of that loss against any profits made in the past three years.

Green technology relief. Purchases of plant and machinery which save energy or water, or improve water quality, are eligible for 100% tax relief on the amount spent. There is no upper limit on qualifying expenditure.   The equipment does not have to be overtly green, such as solar water heating. So if you need a new air conditioning system, for example, you could be eligible if you choose an energy efficient type found on the qualifying technologies list (see www.eca.gov.uk).

Zero emissions goods vehicles allowance. Introduced in this year’s Budget, this scheme provides 100% tax relief on any purchase of new and unused zero emission goods vehicles between 1st April 2010 and 31st March 2015.

Research and development (R&D) allowance. This allowance effectively means that every £10,000 your company spends on qualifying R&D can be treated as a £17,500 tax deduction.

Land remediation allowance. Expenditure on dealing with contaminated land can yield 150% tax relief. Eligible costs include consultancy and internal labour time as well as direct remediation, reinstatement and build costs. For every £100,000 of costs involved with, say, removing asbestos from a property and the associated rebuild, the company’s tax return would treat it as £150,000 spent.

Corporation tax credits
For loss making companies, corporation tax credits provide an immediate cash alternative to the creation of losses from the  reliefs mentioned above for R&D, land remediation and green technology.

A credit is obtained by surrendering the losses that relate to the particular expenditure. Your company receives a cash tax repayment of up to 24.5% of the expenditure incurred, depending on factors such as the type of expenditure and extent of losses.

Provisions
To minimise corporation tax, make sure the company’s profits are properly stated, accruing for all potential allowable expenditure:
• bad debts – any specific debtors that  you believe are unlikely to pay  can be written off against tax;
• stock obsolescence – when stock is hanging about on your shelves, be realistic about its prospects; if it’s not likely to be sold at a profit, write it down to its realisable value;
• dilapidations – accruals for expenditure obligations under rental/lease agreements are tax deductible;
• bonuses – if you anticipate paying directors and employees bonuses in respect of the year, then make sure the company decides before the year end that a bonus may be payable, estimate it and accrue for it.  Provided the bonus is paid within nine months of the year end it can be deducted in the earlier year.
• goodwill – the writing down of some purchased goodwill is tax deductible.  If this goodwill is no longer of any value to the company then consider writing it off to provide additional corporation tax relief.

There are numerous opportunities to reduce your corporation tax bill. As with any activity relating to tax and tax planning, it is vital to use the best professional advice you can find and consult your advisor before making any business decisions so that you make the most of the opportunities available.
 

Francis Clark has offices in Exeter, Plymouth, Salisbury, Taunton, Tavistock, Torquay and Truro. Francis Clark is the winner of the ‘Auditor of the Year - Mid Tier’ in the National Financial Directors’ Excellence Awards 2011, and LexisNexis Best General Tax Practice Award 2009. More information is available by logging on at our Online Information Centre