Are you a limited company looking to make the most of your taxation? While there is a duty to pay the correct amount of tax, there are a few limited company tax loopholes that can help you to save money and stay within the law. In this article, we’ll be taking an in-depth look at the various tax loopholes available to limited companies and how you can use them to your advantage.
Tax advantages for small businesses
Limited companies have a number of advantages when it comes to tax savings, the most notable of which is the ability to claim corporation tax relief on certain expenses. This means that for some expenses, the company can deduct the full amount from their corporation tax bill. Additionally, limited companies may be able to offset losses against future tax bills, allowing for some losses to be used against other taxable income. Limited companies also typically have access to certain tax reliefs and credits, such as the Research and Development Tax Credit and the Patent Box, which allow for further reductions in tax liability. Finally, limited companies can benefit from certain exemptions, such as those on dividend and capital gains taxes, which can result in substantial savings in the long-term.
Tax loopholes for small businesses
There are a number of tax loopholes that can be used to reduce the amount of taxes owed by limited companies. Depending on the country, some of the most common tax loopholes include deducting business expenses, utilizing tax credits, taking advantage of depreciation, and claiming losses from previous years. It’s important to note that some of these loopholes can be complex and should not be used without consulting a tax professional. Additionally, there are often regulations and laws in place to prevent businesses from exploiting loopholes that may be deemed unethical or illegal.
Ways the limited companies can reduce their tax liability
One of the best strategies limited companies can use to reduce their tax liability is to look carefully at their overall expenses. This means scrutinizing how much money is being spent on items like travel, entertainment, supplies, meals and more. Additionally, limited companies should look into tax reliefs and allowances that may be available to them to reduce their tax liability. These may include claiming capital allowances on certain types of assets and taking advantage of research and development tax reliefs. Finally, limited companies should always be sure to keep accurate and detailed records of their finances, as this can make it easier to identify potential areas where they can reduce their tax liability.
Allowable deductions against the company’s profit
If you’re a limited company, there are several deductions you can make to help lower your tax bill. These include:
- Expenses: If you have incurred expenses related to your business, such as travel, equipment, advertising, or other costs, you can deduct them from your taxable income.
- Bad Debt: If you have loaned money to someone who cannot pay it back, you can deduct the amount you are owed from your taxable income.
- Capital allowances: businesses can claim capital allowances / AIA on certain expenditures on fixed assets
- Pension Contributions: If you make pension contributions for yourself or your employees, you can deduct them from your taxable income.
- Business mileage: If you’re a limited company and use your vehicle for business purposes, you can deduct the costs of the mileage from your taxable income. This is known as a business mileage expense claim. To do this, you will need to keep a record of the distance traveled, the vehicle used, and the purpose of the journey. You can then calculate the amount of money that can be deducted from your taxable income.
- Vehicle hire: If you’re a limited company and need to hire a vehicle for business use, you can claim a deduction for the costs of the hire. This can include the costs of the hire, fuel, and maintenance. To claim the deduction, you will need to keep a record of the hire and make sure that the vehicle was used solely for business purposes.
- Business gifts: If you’re a limited company and give business gifts to your customers, you can claim a tax deduction for the cost of the gifts. To do this, you will need to keep a record of the gifts and make sure that they were given solely for business purposes.
- Advertising and marketing costs: If you’re a limited company and have incurred advertising or marketing costs, you can claim a deduction for those costs from your taxable income.
- Accountant fee: The fees paid to accountants for bookkeeping, accounts and tax preparation are allowable deductions.
- Christmas party and other social events: The money spent on these events are deductible expenses.
- Your home: If you use your home for business purposes, such as for meetings or for storing equipment or supplies, you can claim a deduction for the associated costs. This includes any rent or mortgage payments, insurance premiums, council tax, and utility bills.
- Mobile phone and Telephone bills: telephone and internet costs are allowable expenses so you can deduct the cost against profit.
- Directors’ remuneration: Remunerations paid to the directors of the business are a business expense and therefore allowable against business profits.
- Research & development (R&D) costs: Money spent on research and development are allowable costs.
- Computer and its peripherals: If you’re a limited company and you purchase computer equipment such as laptops, desktops, monitors, software, and peripherals, such as printers and scanners, you can claim a deduction for the costs.
- Staff wages: Wages paid to employees are business costs so therefore are an allowable expense against profits.
- The Patent Box: The Patent Box is a tax relief scheme introduced by the UK Government to encourage innovative businesses to protect their intellectual property through patents. The scheme allows businesses to pay a reduced rate of Corporation Tax on profits from patented inventions. This reduced rate can be as low as 10%, significantly lower than the standard rate of Corporation Tax in the UK, which is currently 19%.
To qualify for the Patent Box, businesses have to have patented their invention and must be actively exploiting that patent. In addition, businesses must have undertaken a qualifying activity, such as the development of the invention or the marketing of the product.
The Patent Box is a great way for innovative businesses to save money on their taxes, and can be a great incentive for businesses to protect their intellectual property.
- Employment Allowance: Employment allowance is a tax relief that allows businesses to reduce their employers’ National Insurance contributions (NICs) by up to £5,000 a year. The allowance is available to certain businesses and is designed to reduce the cost of taking on new employees. To be eligible, businesses must have an employer’s NICs bill of less than £100,000, and must have at least one employee on their payroll.
The Employment Allowance can be claimed in three ways: as reimbursement through an online form, as part of an annual payroll submission, or as part of an annual tax return. Regardless of which option you choose, businesses can reduce their NICs bill by up to £5,000 a year, making it easier to take on new staff and provide them with attractive benefits.
- Business rates: Business rates are a tax charged on most non-domestic properties, such as offices, shops, and warehouses. Business rates are the responsibility of the local authority and the amount of tax due will depend on the rateable value of the property. The rateable value is calculated by the Valuation Office Agency.
The amount of business rates that businesses are liable to pay will vary depending on their rateable value, however, businesses can reduce their business rates through a number of schemes such as Small Business Rate Relief, Charitable Relief, and Rural Rate Relief. These schemes are designed to help businesses with lower rateable values and to support businesses in certain areas or sectors.
Business rates can be a significant burden for businesses, so it is important to check whether you are eligible for any relief schemes and to ensure that your rateable value is correct.
- Goodwill and relevant assets: Goodwill and relevant assets are intangible assets that are used to value a business, such as brand recognition, customer loyalty, and relationships with suppliers. These assets can be protected by registering them as trademarks or patents, or by obtaining a copyright or design right.
Registering a trademark or patent can provide businesses with extra protection from competitors, and can also be used to attract investors. For example, registering a patent can help businesses protect their inventions from being copied, and can also be used to gain funding from investors.
In addition, registering a copyright or design right allows businesses to protect their creative works from being copied, and gives them the right to receive royalties or license fees for their work.
By registering their assets, businesses can ensure that they are recognized and protected, and can also take advantage of tax reliefs such as the Patent Box, which provides a reduced rate of tax on profits derived from registered patents.
Tax relief is available to certain businesses on certain intangible assets such as; intellectual property and goodwill. Relief on goodwill and relevant assets are at a fixed rate of 6.5% a year on the lower of:
- The cost of the intangible asset; or
- 6 x the cost of any qualifying intangible assets the business has purchased
Tax incentives for small businesses
Yes, there is a range of tax incentives available for limited companies. For example, limited companies can claim corporation tax relief on their profits and potentially benefit from lower rates of taxation. Additionally, limited companies can benefit from deductions on expenses, such as employee salaries and pension contributions, as well as research and development (R&D) tax credits.
What steps should a limited company take to minimize its tax burden?
There are a few steps that limited companies can take to minimize their tax burden. Firstly, they should look into the different tax incentives and credits that may be available to them. For example, some governments offer tax credits for businesses that hire recent graduates or veterans. It’s also important to review any deductions that may apply to the company and take advantage of any that could reduce the amount of taxes they owe.
Another way to reduce a company’s tax burden is to ensure they are taking advantage of the most favorable tax rate. Companies should compare the different tax rates across jurisdictions to see if moving to a different location could benefit their tax payments.
Finally, companies should keep accurate financial records and make sure their expenses are properly documented. This is especially important when it comes to claiming deductions. Accurate records can also help a company track its spending for future tax planning.
Tax avoidance strategies
Limited companies can use a variety of tax avoidance strategies to reduce their tax liabilities and increase their returns. Some of these strategies include:
1. Utilizing Offshore Accounts: Limited companies can open offshore accounts in countries with lower tax rates, and transfer funds to those accounts to reduce their taxable income.
2. Structuring Salaries and Dividends: Companies often structure their payments to shareholders and employees in a way that minimizes their tax liability. For example, some companies will offer employees bonuses or stock options instead of salary, as these may be taxed at lower rates.
3. Claiming Expense Reimbursements: Companies can maximize their expense deductions by claiming reimbursements for business-related expenses such as travel, meals, and entertainment.
4. Opting for Capital Gains: Companies can offset their income by investing in assets that generate capital gains, as these are often taxed at lower rates than income.
5. Utilizing Tax Credits: Companies can take advantage of tax credits, such as research and development tax credits and energy credits, to reduce their taxable income.
It is important to note that while tax avoidance strategies may help reduce a company’s tax liabilities, they may also be illegal in some countries. Companies should consult with a qualified tax expert to ensure they are taking appropriate steps to minimize their tax liabilities.
Here at YRF Accountants, based in Bolton Manchester, we have a team of qualified and experienced tax accountants who can help and advise you on corporate tax planning and the best possible ways to minimize your corporation tax bill and maximize the utilization of available tax reliefs and allowances. If you’re interested, please feel free to contact us.