Whether you are a small business owner or the owner of a large corporation, you must vigilantly keep track of the tax you owe. Doing this will help you possibly avoid an HM Revenue and Customs (HMRC) investigation. If you fail to keep up with your taxes and get called in for an investigation, you may walk away having to pay extra taxes and, possibly, fines.
Many businesses end up paying too much tax each year because they don't keep track of their expenses and deductions or professionally file tax claims at the year-end. This issue is often faced by those corporations that tend to deal with their taxes on their own rather than hiring tax experts.
To effectively reduce your overall tax bills, you can follow these 6 steps. However, experts at Lawrence Grant are available to address all of your queries related to company taxes.
1. Paying Tax Early
The best tip for a responsible taxpayer is to pay as early as possible. Paying tax early will not only save you from the anxiety of missing the deadlines, but HMRC will reward you with an interest payment of 0.5% for paying early. You can pay company tax bills as early as six months and thirteen days after the beginning of your accounting period. You need to pay an upfront estimate that you think your corporation tax bill will be for the whole year when you pay early. The interest you'll earn from HMRC is considered your corporation's income and needs to be declared in tax returns as it is also liable for tax.
2. Paying Yourself As Well
A corporation is an individual entity, and spending such as salaries are considered part of expenses and ,therefore, can be made before corporation tax is applied . To reduce company tax bills, you should determine a salary for yourself and/or the directors to reduce the amount of the profits on which corporation tax would be calculated. Keep in mind that this salary will become income for the receivers which would require them to pay income taxes on it as individuals. It's always better to consult a tax accountant, who is familiar with both corporation and individual income taxes, to structure this as efficiently as possible.
However, dividends are different from a salary— they are taken from profit. This renders them not particularly useful when the objective is reducing corporation taxes because they cannot be claimed as an expense.
3. Claim Travel Expenses
Another thing you can do is claim your travel expenses. You can claim your travel expenses like tickets, fuel, and accommodation on a business trip. However, Mileage Allowance Relief doesn't include daily commuting to your workplace. However, if you offer a pick and drop service for your employees or carpooling, then you can claim this in travel expenses.
4. Claim Work From Home Expenses
One of the post-pandemic trends is working from home; many employees chose to work from home at their own comfort level while claiming expenses for remote work as well. If you have employees who work remotely, HMRC allows you to claim a portion of the expenses you pay your employees for meeting the additional costs of heating, lighting, internet, telephone, etc. Also any office equipment you provide your employee for remote work, you can claim all these expenses in the tax return.
5. Organising Events for Staff
Although you can't claim expenses on client lunches, you can claim money spent on company events. This is why many companies hold annual parties, as it keeps the staff morale high and helps reduce company tax bills. To consider this amount as claimable, the HRMC has defined some conditions like:
- First, the cost should not exceed £150/ person, including VAT
- The party must be an annual event like a Christmas party
- Since it's for the employees so, you need to ensure that all employees are invited and are the major participants
- There shouldn't be any exemption for shareholders who are neither an employee nor company directors
6. Make Purchases Via Company Account
One of the mistakes that company owners make is that sometimes even for company transactions they use their personal accounts. Although you can still claim business expenses made on a personal account but is harder to do so, which is why it is recommended that you keep accounts separate. Many businesses claim extensive office equipment under "Plant and Machinery". All expenses under this are deducted from profits reducing the net profit amount, thus also reducing overall tax on the profit.
You can reduce company tax bills by following these simple practices. However, most businesses end up paying a lot more in tax than they are liable to because they don't hire professionals and fail to mention all the expenses or fill the form correctly.
To better understand what you need to pay and what you can claim, please make sure you consider talking to experts at Lawrence Grant before filing your next tax return.
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