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A common query:

“I need to know if there is anything we can do to bring the corporation tax figure down. We have had several lean years of late and we worked really hard last year to turn things around and I just find it hard to believe that we should be paying another record amount of corporation tax. Is there anything we should be doing better to be more tax efficient?”

And the reply:

” Even with the record tax bill, the company option is still the best for you. By way of quick comparison:

– tax this year as a company, £13,436

– equivalent had you been a partnership, £17,852

“OK, what can you do to reduce the tax bill? Alas, I fear not a lot.

“The common question is “Could we spend (eg) £5,000 on advertising”. Well, yes you could, but £5,000 spend elsewhere takes £1,000 off of your tax bill – so you still have to “find” £4,000 of your own money. The equation is the same for advertising, repairs, just about any expense – and its the same, or worse, for spending on equipment or plant.

“Putting monies into pension is going to be the same – for every £5 you put in, roughly £1 comes of your tax bill, leaving £4 to be footed by yourselves.

“There are tax privileged investments like EIS and VCT which can actually get you substantially more tax relief, but they are quite risky and I wouldn’t be comfortable in recommending them to you (they are not something I would use personally either).

“So in blunt terms, if you need to spend on advertising, repairs, equipment, and so on, fine, you will get about 20% of the expense back in reduced tax, but don’t let the tail wag the dog, as you’ve still got to fund the other 80%. Likewise things like pension – if you can afford to increase pension investment, great, you’ll get some tax relief on what you put in, but only about £1 of tax relief for £4 of your own money.

“In short you’re doing everything right, and set up as efficiently as possible – we would let you know if you weren’t anyway – but a better year means, alas, better profits and a higher tax charge.”