How to Reduce Corporation Tax

Reducing corporation tax is a complex issue with many factors to consider. Corporations pay taxes on their profits, and the tax rate can vary depending on the country or jurisdiction.

To know how to reduce corporation tax, businesses can take advantage of various tax incentives and deductions provided by the government.

However, it is essential to note that being able to reduce corporation tax can have both positive and negative effects on the economy.

In general, reducing this tax can attract more businesses to a country or region, as lower tax rates make it more profitable for them to operate there. This can lead to increased investment, job creation, and economic growth.

On the other hand, reducing this tax can also result in a reduction in government financial performance, which can have negative impacts on public services and infrastructure.

What Is Corporate Tax?

Before looking at how to reduce corporation tax, you need to know what it is. This is a type of tax that is levied on the profits earned by companies, corporations, and other businesses.

It is typically calculated as a percentage of the taxable profits of the business and is paid to the government of the country or jurisdiction where the business operates.

The purpose of this tax system is to generate revenue for the government and to ensure that businesses are contributing their fair share to society in the most efficient way, just like income tax.

In most cases, corporations are required to file annual tax returns, reporting their income and deductible expenses and calculating the amount of tax owed from trading profits.

They may also be required to make estimated tax payments based on business mileage throughout the year to avoid penalties and interest charges.

Can I avoid Paying Corporation Tax?

Some countries offer tax relief incentives and credits to encourage businesses to invest in certain activities or to locate in specific areas. Looking for these areas is a great way to learn how to reduce corporation tax.

For example, a government may offer tax credits for companies that invest in research and development or hire new employees. These incentives can help by providing a sort of tax credit to stimulate growth.

20 Ways To Reduce Your Corporation Tax

Reducing corporate taxes can help businesses to increase their profits and improve their competitiveness. Here are 20 ways that businesses can reduce this tax:

Take advantage of tax incentives and credits

Governments often offer tax incentives and credits to encourage businesses to invest in certain activities or to locate in specific areas.

These incentives can help to reduce the overall tax burden on businesses in the most tax-efficient way.

Claim relief on capital expenditure

Businesses can claim corporation tax relief on certain types of capital expenditure, such as the purchase of new equipment, machinery or any other business expense.

There are a variety of allowable business expenses incurred that can be included within this that can reduce your corporation tax liability.

Claim relief on research and development (R&D) expenditure

Many governments offer R&D tax relief to encourage innovation and economic growth.

Patent Box Tax Relief

This is a tax incentive scheme that allows businesses to benefit from a lower rate of tax on profits earned from patented inventions.

Maximise the use of tax losses

Businesses can carry forward tax losses from previous years to offset future profits as an allowable expense.

This is great for business use and can reduce costs incurred over a certain accounting period when they pay corporation tax.

Claim relief on charitable donations

Businesses can claim relief on donations to registered charities. While this is for business purposes and can help you save money, it frees up business money to do some good!

Pay staff bonuses

Bonuses paid to staff are business expenses that are deductible and can help to reduce corporation tax bill expenses.

This can ultimately help increase company profits and reduce your corporation tax liability.

Use salary sacrifice schemes

Businesses can offer salary sacrifice schemes to their employees, which can reduce the amount of tax and national insurance contributions that both the employee and employer pay.

Take advantage of the annual investment allowance

Businesses can claim a 100% tax deduction on the first £1 million of qualifying capital expenditure in a tax year. This helps reduce corporate tax liability and claim business mileage.

Pay pension contributions

Pension schemes made by businesses are tax deductible and can help to reduce the overall tax bill.

Incorporate in a country or region with lower tax rates

Businesses can reduce their corporation bill by incorporating in a country or region with lower tax rates.

Restructure the business to reduce taxable income

Businesses can restructure their operations to reduce their taxable income, for example, by changing the ownership structure or relocating certain activities.

Use transfer pricing

Businesses with international operations can use transfer pricing to allocate profits and expenses between different jurisdictions, which can help to reduce corporation tax liability.

Use tax-efficient debt financing

You can use debt financing to reduce your corporation bill, for example, by issuing bonds or loans that are tax deductible.

Development expenditure credit and the use of a limited company are both ways to do this. This can be done on a tax-free basis.

Claim capital allowances to reduce the corporation tax bill

Businesses can claim capital allowances on certain types of assets, such as equipment, which can help to reduce corporation tax bill expenses.

Claim tax relief for losses to Reduce your corporation tax liability

Businesses can claim tax reliefs for losses, such as carry forward loss relief, group relief, or terminal loss relief. Looking at allowable expenses can reduce tax bill expenses.

Consider tax-efficient share schemes

Businesses can use tax-efficient share schemes, such as employee share ownership plans, to reduce their liability.

Take advantage of tax treaties

Businesses with international operations can take advantage of tax treaties between different countries to reduce their overall tax liability.

Use leasing arrangements

Leasing arrangements can help businesses to reduce their capital expenditure and can be tax efficient. Property companies can use this to their advantage when it comes to certain business assets.

New commercial building expenditure through a limited company can become a separate legal entity and reduce corporation tax bill expenses when you pay tax. This early payment helps you save more in a tax year.

Keep accurate records

Keeping accurate accounting records of income and expenses is essential for reducing tax liability and avoiding penalties or fines.

By paying your corporation tax bill early and keeping accurate records, you can reduce corporation tax.

In conclusion, reducing this tax can help businesses to increase their profits and improve their competitiveness. It is important to work with a qualified accountant to get professional advice about your tax affairs to ensure that all tax reduction strategies are legal and compliant with the relevant regulations.