Limited companies, foreign companies with local branches, and other profit-making companies that make trades or have investments pay corporation tax (CT). Some companies are eligible for tax relief. Our experts have compiled a list of aid programs that reduce corporation tax liability while remaining tax-efficient.
The Corporation Tax Bill
The new budget announced on March 3, 2021, states that the corporation tax rate will rise from 19 per cent to 25 per cent as of April 2023. For companies with pre-tax earnings below £50,000, the rate will remain at 19 per cent. It will increase proportionately with the earnings until £250,000, at and beyond which the tax rate will increase to 25 per cent.
A company making a profit of £250,000 will pay £47,500 at 19 per cent of earnings considered tax-deductible for taxation purposes. This amount typically goes down for larger businesses to some extent. By 2023-24, a company’s taxes will rise to £57,500. As a small business owner, you must know how important it is to pay attention to these changes.
Patent Box Tax Relief
The patent box allows UK-based companies to use corporate taxes by encouraging companies to house their valuable intellectual property within the country and use it for commercial purposes, like earning profit from patented inventions.
As a result, these companies are less likely to pay CT or corporation tax. To do so, they must elect a patent box if they wish to reduce CT. For a group of companies to be able to pool their patents together and file a single patent application, certain conditions must be met:
- The company is liable for the corporation tax bill
- The profits are from the use of the patents
- The company owns or exclusively licenses-in the patents
- The company has undertaken qualifying development on the patents
A company can only obtain patent box tax relief for a patent if it has licensed the patent to another entity. The licensing of the patent means the patent owner is no longer using the patented process or product. To obtain the tax relief, the company must show that it made a significant contribution to creating or developing the patented product or a component product of the patented invention.
Research and Development Tax Relief
Research and development claims can be used for corporate tax relief. Claimable expenses include advanced research and development in specific science and technology fields. If a corporation’s research and development efforts in a given sector do not result in any progress, it can still claim the tax relief.
Although for a project to be eligible for this tax relief, it must meet the definition of R&D:
- look for an advance in science
- have to overcome uncertainty
- try to overcome this uncertainty
- cannot be worked out easily by a professional in the field
Creative Industry Tax Relief
Companies who qualify for creative industry relief can increase their business expenses beyond the usual capital allowance limit. To be entitled to an SME rate, a company must fulfil all the following criteria:
- Operate in the film, high-end television, children’s television, animation television, video games, theatrical shows, orchestras or museums or galleries industries
- Pay corporation tax
- Have a full-time managerial board that makes decisions
- Have staff or non-managing directors participate in decision making
Furthermore, to qualify for aid under the creative industry tax relief, all films and television shows must be certified as British by the British Film Institute. This helps the BFI ensure that European citizenship cannot be used to bypass these conditions.
Conclusion
The government changed the corporation tax bill to reduce the burden on small businesses. Luckily, even with the significant increase in the corporation tax bill, certain companies will still be able to pay fewer taxes and enjoy tax relief. By following the advice given, you can help your business grow and prosper in the UK and beyond.
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