What is the importance of corporate tax planning?

What is the importance of corporate tax planning?

Getting the right corporate tax planning advice can make a huge difference to your profits and the growth of your company. Whether it's corporation tax, capital gains tax or planning large expenditure projects at the right time.

As a business owner getting great corporate tax planning advice is important as it could save you thousands of pounds every year. Understanding tax reliefs and tax exemptions can help you to achieve your financial goals.

In this blog, I'll explain some of the main areas you should include in your corporate tax planning and the benefits to you and your company, along with changes happening in the coming year that mean you should consider your tax planning now.

What is corporate tax planning?

This may seem like a basic question and one that many business owners believe they understand. However, corporate tax planning can stretch across a much wider range of areas than some owner managers realise. Corporate tax planning is undertaken by businesses to reduce their tax liability.

A professional tax advisor will advise and help you to become more tax efficient in areas such as:

• Making use of tax reliefs and opportunities.

• Ensuring the best capital vs revenue tax treatment.

• Implementing and helping you to create tax-efficient company accounting policies.

• Considering the most tax-efficient business structure for your business and advising on company reorganisation if necessary.

• Advising on tax efficient profit extraction.

• Planning for minimising tax on major transactions such as property purchase/sale or business sale.

• Long range tax planning and succession planning.

• Maximising the efficient use of any tax losses.

• Helping you to meet your corporate tax obligations.

The larger your company grows, or if you run a group of companies, the more complex effective tax planning becomes. Large company tax planning may include looking at your business structure, international tax planning, and large projects such research & development or business acquisition or selling a business.

Should you be tax planning?

The simple answer is YES!

In the ever-changing climate, it’s now more important than ever to have a sound, well thought out tax plan. A tax plan is a critical part of your overall financial strategy.

Whether you’re just starting your business or a seasoned veteran, it’s never too late or too early to build a plan. You must seek professional advice, give this thought and start taking action.

Getting your plan in place will allow you to allocate or reinvest money back into your business to fund growth and will ultimately reduce your overall tax liability.

What are the benefits of corporate tax planning?

There are many benefits of tax planning as you can see where your tax liabilities are:

• Increased tax efficiency.

• Potential to reduce your tax liabilities.

• Greater control.

• Clear planning on timing capital expenditure.

• Saves time.

• Reduces errors.

• Enables future growth.

• Ensures you're up to date with latest tax regulation.

What are the tax liabilities a business should plan for?

Corporation tax

Corporation tax is paid to the government by UK companies and foreign companies with UK offices. Businesses are currently charged 19% of their profits. Corporation tax rates are changing in 2023 (see details below).

There are many ways to reduce a company's corporation tax bill, below are just some areas to consider:

1. Claim R&D Tax Relief.

2. Claim Patent Box Tax Relief.

3. Invest in plant and machinery (P&M).

4. Capital allowances on property.

5. Claim all business expenses.

6. Pension contributions.

7. Offer share schemes to employees.

8. Claim all available loss reliefs.

Capital allowances

Capital allowances are a type of tax relief for businesses. They allow you to deduct some or all the value of an item from your profits before you pay tax.

You can claim capital allowances on:

• equipment

• machinery

• business vehicles, for example vans, lorries or business cars

These are known as ‘plant and machinery’.

Firstly, you need to consider when and how you incur expenditure. If you’re going to buy a capital item, like a big piece of machinery, there will be tax implications and you need to know whether it would be best to make the purchase before or after your year-end.

This decision will be different for each company and depends on lots of other factors, including the level of profit you’re expected to make and what else you may have bought that year.

You can claim different amounts, depending on which allowance you use.

The capital allowances (also known as plant and machinery allowances) are:

• annual investment allowance (AIA) - you can claim up to £1 million on certain plant and machinery

• 100% first year allowances - you can claim the full amount for certain plant and machinery in the year that it was purchased

• the super-deduction or 50% special rate first year allowance - you can claim these for certain plant and machinery you buy from 1 April 2021 up to and including 31 March 2023

• writing down allowances - you can claim these if your plant and machinery does not qualify for AIA, or you’ve already claimed the maximum amount

If an item qualifies for more than one allowance, you can choose which one to use.

You need to consider your year end. It may be that if you delay a purchase, you will get more allowance on it, or, if you haven’t spent very much that year or rates are due to change, it may be more tax effective to bring a purchase forward. So, business tax planning is important in determining when to invest.  

R&D tax relief

Another element to consider is whether or not your company qualifies for R&D tax relief.

Research & Development (R&D) tax relief is an incentive available to UK limited companies which encourages investment in innovation. R&D tax credits can reduce a company's tax liability, or, if a company isn't in profit, provide a payable cash refund.

The relief is geared towards businesses that can demonstrate they're making 'appreciable improvements' or overcoming technological/scientific uncertainties. R&D tax reliefs provide a 130% uplift on qualifying costs (Note: the R&D uplift is reducing from 130% to 86% from 1 April 2023).

Extracting profits from the business

Whilst profit extraction is more an area of 'personal tax planning', for many business owners, personal wealth is inextricably linked to the business.

There are several factors to consider when reviewing the most appropriate and efficient method to extract profits from your limited company:

• Corporation Tax rates.

• Personal tax rates.

• Utilisation of spouse’s personal allowances.

• Dividend Allowance.

• Overall levels of personal and household income.

• Personal pension contributions.

• Employment Allowance.

• Involvement in Research and Development Activity. 

• Exit strategy.

Plan now for upcoming tax changes in 2023

What changes to corporation tax will be happening in 2023?

The corporation tax will increase to 25% from 1 April 2023, affecting companies with profits of £250,000 and over.

Small companies with profits up to £50,000 will continue to pay corporation tax at 19%, with profits between these two figures being subject to a tapered rate between 19% and 25%.

If you are looking to dispose of chargeable assets, you should consider bringing forward the date of the disposals to before 1 April 2023 to benefit from the lower rate.

Is the Super deduction and Annual Investment Allowance (AIA) being extended?

The ‘super deduction’ allows companies to claim 130% relief on the acquisition of certain new plant and machinery. This runs to the end March 2023, meaning that for every £100,000 invested in qualifying assets, the business will receive a £130,000 deduction against its taxable profits in the year of acquisition.

The Annual Investment Allowance (AIA), has been extended to 31 March 2023, meaning that expenditure on qualifying plant and machinery up to £1 million provides a 100% deduction for tax purposes.

But the clock is ticking, so companies planning to undertake significant capital expenditure should consider bringing these projects forward to maximise the benefits of these reliefs.

R&D tax relief expansion

There are three major changes to the R&D tax relief legislation which will take effect from 1 April 2023:

1. The R&D qualifying expenditure will now include data and cloud computing

2. A potential restriction on the inclusion of costs incurred outside the UK for UK R&D claims

3. An expansion of targeted anti-avoidance measures to counter exploitation of the R&D tax relief regime.

Conclusion

The importance of tax planning cannot be overestimated. Working with a professional advisor is crucial to ensure you claim tax credits and reliefs and take full advantage of all the tax incentives open to you to minimise your tax burden.

It is important to keep the dialogue open with your accountant or tax advisor throughout the whole year. Talk to them about any transactions you are thinking of making or changes in the business because you might end up with a better overall tax result.

To find out more about our corporate tax planning services, contact our Chester, Liverpool or Wirral offices and speak to one of our tax advisors today.