How To Make Profits And Pay No Tax - Case Study #1

Posted on in Business Tax

It might feel as though large companies get all the tax reliefs, but any additional 'reliefs' mainly arise from owning a global brand. 

So what can many UK based companies do? Let's illustrate with a Case Study:

Imagine you're a consultancy business with a few staff. After receiving tax efficient investment funds under SEIS (not available to large companies) you purchased top quality computer equipment for £80k for your staff to use and spent £120k on research & development into groundbreaking consultancy software.

Your profit for last year was made up of:

Sales             £400,000

Costs           (£220,000) (£120k R&D + £100k salaries/other costs)

Depreciation (£20,000)

PROFIT         £160,000

If you know the corporation tax rate is 20%, you might expect your company tax bill should be £32,000.

However, a few adjustments are required to know how much tax you should pay.

Profit            £160,000

Depreciation  £20,000 (Ignored for tax purposes)

AIA                (£80,000) (Capital allowances which replace the Depreciation - 100% of the computer equipment cost)

R&D             (£156,000) (Tax enhancement available to small businesses)

TAX LOSS    (£56,000)

Your profit of £160,000 has become a tax loss of £56,000! You've become a tax avoider!

This and other tax avoidance is perfectly legal. 

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Guest Friday, 14 December 2018