If there were a magic money tree, what would you do with some money to spend on your business right now?
Could some marketing transform your business? Being able to be more visible and remind people of your company would help to bring in future sales.
Or maybe you could use the money to reward staff? Certainly, the past couple of months have been tough on everyone, and valuable staff deserve to be recognised.
What about buying some new equipment? Or making greater pension contributions? Or even paying it back a little and making some donations to charity?
If only there was a way to lay your hands on this magic money. Well, there is.
All of these, and more, are genuinely legitimate tax-deductible expenses. Which means, if you’re paying corporation tax, the chances are you could instead be using some of that money to actually reinvest in your company, its sustained growth and future potential.
What is corporation tax?
Corporation tax is a tax paid to HMRC on profits from doing business as a
- a limited company
- any foreign company with a UK branch or office
- a club, co-operative or other unincorporated association, eg a community group or sports club
Rather than getting a bill from HMRC, business owners have to take the responsibility themselves to identify the taxable profits they are making, report on this and then make the appropriate payment. Obviously, HMRC needs to be sure that you’re making the right level of payment so there is paperwork associated to this, and that’s why most companies have their accountant take care of this for them.
Accountants identify all the business expenses that are tax deductible, and these are offset against the profits to reduce the tax bill.
It’s important to note that not all business expenses are tax deductible and so, although you might be making outpayments running your business, for the purpose of completing your company tax return and paying corporation tax, some of those expenses will be added back on as profit. One of the most commonly misunderstood examples of a non-tax-deductible business expense is client entertainment.
What it does mean however is that, if you’re spending money in certain ways to grow the business, increase your pension pot or buy equipment, this will effectively be reducing your corporation tax bill. So maybe it’s looking more likely that you could have the money in the business to invest in some marketing or make a charitable donation after all?
Business expenses v Tax-deductible expenses
As above, they are not one and the same.
Not every £ spent by people in the business will go towards reducing your corporation tax bill. Take note of some of the examples below:
* conditions apply to some of the above examples so seek advice
So where is this magical money tree?
Well, obviously and very sadly, there isn’t a tree of money.
But if you’ve made money through doing good business, before the taxman get their cut, it’s worth taking a look to see if you have taken every opportunity to use any of that profit to reinvest in the business or, indeed, in your future earnings.
We set up planning meetings with our clients in good time before their year-end so we can assess profits levels and discuss how money could be redeployed back into the business.
Some of the options we mentioned at the beginning, for example, can be funded this way:
The cost of business gifts is tax deductible for the business if the gift (a) contains a conspicuous advert for your business, and (b) is NOT food, drink, tobacco or tokens or vouchers exchangeable for goods, and (c) does not amount to more than £50 per person per year.
Creating some branded items – pens, mugs, etc – will not only serve to reinforce a relationship but will also provide a marketing opportunity should they use them in other setting like meetings, Zoom calls etc.
There are a lot of options here. Some of the possibilities include:
- Providing mobile phones (no more than one per employee)
- Subsidising certain forms of transport to and from work – including bus fares
- Providing workplace nurseries and crèches
- Sporting and recreational facilities
- Health checks
- Car parking
- Paying relocation expenses
- Up to £150 per person per year for team parties
- Making cash awards for contributions to a team suggestion scheme
- Allowing team to use pool cars for business purposes
- Paying team up to an extra 5p a mile if they use their own car to take fellow employees on the same business trip
- Providing company bicycles
- And even… paying employees up to 20p a mile when they use their personal bicycles on business journeys! (or up to 24p a mile for a motorbike)
Not only might you be able to increase your own pension contributions, but you could also consider making employer contributions into a pension scheme, which can provide significant savings for both employee and employer.
In the past year, we’ve all borne witness to livelihoods and lifestyles suffering significant change. If you’re in the position to make a contribution, the Taxman can make your donation even bigger by using, for example, Gift Aid and payroll giving. Gift aid contributions are also tax deductable.
A 100% Annual Investment Allowance of up to £1million is available on most plant and machinery. Care is required because the amount of relief available can be affected by your business year end, check with your accountant.
It’s definitely worth taking a look at your accounts or having a chat with your accountants about what monies could be reinvested in the company before your year-end so that you can take full advantage of your hard-earned profits.
Blue Rocket are Kent based accountants working with companies in all sectors including construction, cleaning, retail, consultancy, manufacturing and hospitality to help them expand their horizons and reach for the stars
The information and data in this article was correct at the time of publishing and every attempt is made to ensure its accuracy. However, it may now be out of date or superseded. Blue Rocket Accounting make no representation or warranty of any kind regarding the content of this article and accept no responsibility or liability for any decisions made by the reader based on the information and/or data shown here.