Avi is a small limited company business owner reaching his end of year and had a couple of questions on his end of year accounts. He is worried that he may be paying too much corporation tax.

1) What ways can you reduce a company’s corporate tax apart from giving out dividends to the shareholders and reducing the closing stocks?
2) If i was to buy an asset before the company’s operation, how do I show this in the company accounts? How do I show that the money sent to buy the asset is financed by the company and not the director? Can I use this to reduce Corporation Tax?

Tax Reduction Strategies

There are a number of UK corporation tax reduction strategies that might be available to you:

  • make sure you claim for all business expenses
  • pay a tax efficient directors salary
  • invest in staff development
  • invest in plant and equipment
  • consider R&D tax credits – are they applicable for you?

Our Corporation tax Checklist may help you identify other strategies that can be applied to your business.

Will Dividends Reduce Corporation Tax?

Dividends are paid out of profit after tax so paying dividends will not help you reduce your corporation tax bill. The tax has to be fully accounted for before you can calculate and provide for a dividend.

Be careful not to overpay dividends and find that you cannot pay your Corporation Tax bill.

Reducing Stock as a Tax Reduction Exercise

If you reduce closing stock, then you increase cost of sales so that will reduce profits attributable to tax – however – devaluing stock as a corporation tax reduction exercise is not the right approach to take and risks a deliberate understatement of stock in your closing balance sheet. This reduces the value of your balance sheet and reduces profits available for distribution as dividend.  Your valuation of closing stock should be based on more sound principles – stock should be held in the balance sheet at the lower of cost or net realisable value. Run a stock check at the end of the year (quarterly is better), look for old lines, dead stock, broken stock and write this off so that the carrying value of stock in your balance sheet is a fair value of the actual stock you hold.

Director Bought Assets

If you were to buy an asset before the business was incorporated – then the asset is yours. You can do with it what you will, including selling it to the company.

You would sell the asset to the company at the lower of cost or fair market value on the date of the sale.

   Double Entry

31-Dec- xx  Being the purchase of Asset A from Director B

Transaction Debit Credit
 Asset – Balance Sheet 5000
 Director B Loan Account – Balance Sheet 5000
Total 5000 5000

Directors Loan Account – The asset was financed by you, the director – the company owes you this money until such time as it is repaid.

You can deduct the full value of an item that qualifies for annual investment allowance (AIA) from your profits before tax. You can claim AIA on most plant and machinery up to the AIA amount of £200,000 from 1st January 2016 onwards.

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