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Spotlight on corporation tax

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In the Autumn Statement, the Chancellor confirmed a series of forthcoming changes to corporation tax. Here we consider the changes, together with some useful tax-saving tips and strategies to help minimise the corporation tax bill.

Future changes

In the 2016 Autumn Statement, Chancellor Philip Hammond reconfirmed that the corporation tax rate will fall from 20% to 19% for the Financial Year beginning 1 April 2017, and will reduce again to 17% for the Financial Year beginning 1 April 2020.

The government is also reforming the rules governing corporate losses carried forward from earlier periods. The reform will offer more flexibility over the use of losses which arise on or after 1 April and which are carried forward, by allowing them to be useable against profits from different types of income and other group companies.

The reform will also restrict companies' use of losses carried forward so that they cannot reduce their profits arising on or after 1 April 2017 by more than 50%. This restriction will apply to a company or group's profits above £5 million. It should be noted that this restriction applies to losses carried forward arising at any time.

Tax-saving strategies

Careful planning can help to minimise the corporation tax bill. Consider the following strategies:

Capital allowances

The Annual Investment Allowance (AIA) provides 100% relief up to the value of £200,000. This is available for the purchase of most plant and machinery (excluding cars). Any annual expenditure over the maximum amount enters either the main rate pool or the special rate pool, attracting a writing down allowance (WDA) at the rate of either 18% or 8% respectively.

Businesses that invest in energy-saving or environmentally friendly equipment can also claim a 100% first year allowance. New cars with low CO2 emissions (up to 75 g/km, reducing to 50 g/km from April 2018) also qualify for a 100% first year allowance.

Deductible expenses

Expenditure incurred before the company’s year end may reduce the current year’s tax liability. Bringing forward expenditure by even a few weeks on items that are deductible from profits could accelerate tax relief by 12 months.

Hire purchase and lease purchase

This can offer a useful vehicle for financing the purchase of an asset. Plant and machinery acquired on hire purchase should qualify for capital allowances on the full purchase price, regardless of whether the business has paid only the deposit.

Pension contributions

Contributions made to registered pension schemes are generally allowable for tax in the year of payment. Tax relief may need to be spread where contributions for the current period exceed contributions made during the previous period by a set amount.

Bonuses

It is possible to make provision in the annual accounts for bonuses which are paid to directors and staff up to nine months after the year end. These must be charged to PAYE and national insurance as appropriate.

Capital gains

Capital gains are taxed at the rate of corporation tax, after deducting from the sale proceeds the market value at March 1982, or cost of acquisition if later, as well as costs incurred in improving the asset, an indexation allowance (to account for inflation), and certain disposal costs.

We can advise on all aspects of corporation tax, from dealing with compliance to timing your capital expenditure.