Cutting Your Corporation Tax Liability Through Expenses

Corporation tax for businesses is like income tax for individuals. However, while employees have little choice in the way that they pay their tax (with most Income Tax being deducted automatically via the PAYE system), companies have considerably more leeway when it comes to HM Revenue and Customs (HMRC).

Before finalizing your expense claims, it's worth checking which deductions might attract HMRC scrutiny using our free HMRC Red Flag Checker.

Net Profits

In the first instance, it should be noted that corporation tax applies only to limited companies or to unincorporated associations. Partnerships and sole traders do not pay corporation tax, but rather are subject to income tax and capital gains tax. The basics of corporation tax, including the rates at which it is paid, are covered in more detail in an article elsewhere in this section (see What Is Corporation Tax?).

The second important point to note is that corporation tax applies to a company’s net profits; that is, the total profit after any allowable expenses have been deducted (but, of course, including both investment income and any capital gains that have been accrued). This principle is important when looking at ways to minimise your corporation tax liabilities.

As can be seen, one of the key ways in which companies can minimise the net profit figure that they submit to the taxman is to ensure that all possible expenses are accounted for on the balance sheets and deducted from that net profit. In turn, this will reduce the company’s overall corporation tax liability.

Another way of thinking about this is to consider allowable expenses as exempt from corporation tax, so the more allowable expenses you have, the lower your corporation tax will be.

HMRC Red Flag Checker

Find out which areas of your finances HMRC is most likely to query, what you should be declaring, and roughly what you may owe.

Try our HMRC Red Flag Checker free, here on this site →

Allowable Expenses

Having established this principle, it is important to understand exactly what can be counted as an expense. Primarily, it should always be remembered that an expense can only be offset against corporation tax if it is judged to have been incurred solely for business purposes.

There are a number of key expenses that are likely to apply to most limited companies, regardless of their size. These include:

• National Insurance payments on behalf of employees
• Business insurance
• Accounting costs
• Employees’ wages
• Interest paid on business loans
• Pension contributions made on behalf of employees

Your situation may be slightly different. ask a question below ↓ and our editorial team will reply with our advice.

Timing of Expense Claims

The timing of these expenses claims can also be vital in order to make sure that the maximum benefit is drawn from your reduced corporation tax liabilities. In many cases, it is tempting to put off spending money on sundries, such as redecorating an office or renovating some equipment. However, from a corporation tax point of view it makes sense to avoid incurring these expenses at the beginning of an accounting period.

By bringing forward your required expenditure to the end of the current accounting period (likely in most cases to also be the tax year) it is possible to receive the reductions on your corporation tax almost 12 months in advance of the date on which they would otherwise appear. With this in mind, spending the money on a prospective repair or advertising campaign sooner rather than later may well appear a more attractive option.

The Next Step

Now that you have read through the advice above, you might want to put it into practice. Our HMRC Red Flag Checker lets you find out which areas of your finances HMRC is most likely to query, what you should be declaring, and roughly what you may owe. Try it now →