Company Directors. Listen up. Tips to save Corporation Tax will be important to you in the coming months. The Corporation Tax [CT] deadline for companies with a 31 December 2022 year end is the 23rd of September. That is the last day to file your CT return and pay the balance owing for 2022.
Let’s look at some ways to save Corporation Tax. Revenue could even end up owing you money. Now wouldn’t that be sweet! We will focus on
- Losses
- Pension contributions
- Grants
- Capital Allowances
- Salary/Bonus
- File on time
Losses
I can hear you say sure if we have losses, we won’t have CT to pay anyway! Yes and No. Depends.
Value Basis
Small Tech Ltd had a bad year in 2022 with trading losses of €150,000. The only other income in 2022 was rent, with a profit of €50,000. The trading profit for the year ended 31 December 2021 was €20,000 with a rental profit of €30,000.
Without using the losses, the CT liability for 2022 would be
| Rental Profit | €50,000 |
| Tax liability 25% | €12,500 |
You can use the losses on a value basis to offset the tax liability on the rental income. Remember that trading profits in a company are liable at 12.5% whereas investment income like rent is at 25%. As such, the value of the losses
| Losses | €150,000 |
| Value of losses at 12.5% | €18,750 |
So, we can use €100,000 of the trading losses, on a value basis, to reduce the CT to nil.
| Rental Profit | €50,000 |
| Tax liability 25% | €12,500 |
| Less losses €100,000 x 12.5% | €12,500 |
| Tax liability | Nil |
Carry back
You can carry back the balance of the losses to offset the trading profits of the previous year. The original CT liability for 2021 was
| Trading Profit 2021 | €20,000 |
| Rental Profit 2021 | €30,000 |
| Tax due trade 12.5% | €2,500 |
| Tax due rental 25% | €7,500 |
| Tax liability 2021 | €10,000 |
We carry back the balance of the losses from 2022 to 2021 and use them as follows
| Trading Profit 2021 | €20,000 |
| Offset losses from 2022 | (€50,000) |
| Revised trading profits | Nil |
| Rental Tax liability | €7,500 |
| Less losses balance €30,000 x 12.5% | €3,750 |
| Tax liability | €3,750 |
| Refund due | €6,250 |
If Small Tech Ltd had profits in 2021, then it would carry forward the trading losses to 2023. It can use the losses forward to offset against trading profits only and not the rental profit of 2023.
Other losses
A rental loss is ring fenced. You can carry that forward or back but can only offset that against rental profits.
Trading losses can also be offset against Capital Gains in the current year.
Pension Contributions
Pat Tubridy is an owner and director of Lucrative Deal Ltd. He’s unsure about the pension contributions his company should make in 2023. The company pays €1,000 per month and it would usually make a top up contribution of €38,000 before the end of the year.
The €12000 is an ordinary annual contribution. The top up before the company year-end is a special contribution. Revenue, in most cases, will want the special contribution spread over a few years. Divide the special contribution by the annual contribution to give you the number.
| €38,000/€12,000 | 3.166 |
You round that down to 3 years. As a result, the special contribution is spread as follows
| 2023 | €12,667 |
| 2024 | €12,667 |
| 2025 | €12,666 |
In 2023 the company will get a deduction for the €12,000 ordinary annual contribution and for €12,667. But could it get the full tax relief in 2023?
Increase monthly payments
From 1 January 2023 Pat decides to increase the monthly payment from €1,000 to €2,500. The ordinary annual contribution is now €30,000. At the end of 2023 he decides to make a special contribution of €20,000. Total funds into the company pension are €50,000. Same as before. When we now divide the special contribution by the annual contribution the number is
| €20,000/€30,000 | 0.67 |
As the number is less than one there is no need to spread and the full €50,000 is allowed in 2023.
The company is in funds to pay the increased monthly contribution. Being able to claim all the payments in the year the company pays them would save CT of
| €25,334 x 12.5% | €3,167 |
Grants
Most grants we have seen over the last few years have been Covid related. These were usually government grants to help businesses with running costs. Once they are for running costs the grants would be taxable as income. Not all grants are taxable as income.
Bar Coad Ltd runs a great bar in a local town. The company needs to update the tap system to bring it up to modern standards. The cost of this work is €20,000. Young Tom Coad’s eyes water when he hears the news. But he is great mates with the Diageo rep, and he finds out that he could get a grant. Diageo are true to their word and the company will get a grant of €15,000.
If you tax the grant as income, it will cost €1,875 in CT [€15,000 x 12.5%]. To lessen the blow the company would claim capital allowances at 12.5% That would reduce the tax cost but not by a lot.
| Cost of equipment | €20,000 |
| Capital allowances at 12.5% | €2,500 |
| Tax saving €2,500 x 12.5% | €313 |
| Net Tax cost [€1,875-€313] | €1,562 |
But the correct way to treat the grant is to reduce the cost of the asset by the grant value.
| Cost of equipment | €20,000 |
| Less grant received | €15,000 |
| Net cost for Capital allowances | €5,000 |
| Capital allowances at 12.5% | €625 |
| Value of capital allowances €625 x 12.5% | €78 |
By doing this the right way Bar Coad Ltd has saved over €1,500 in CT.
Capital Allowances
Young Mark Deely loves machinery. So much so that he set up Deely Contractors Ltd in January 2021. Business is good but he needs to replace an old tractor. He has no mass on that Massey anymore. It’s costing him too much in repairs and needs something better.
The company will buy a new Valtra X47D and trade in the 2015 Massey. The net cost for the company is €80,000. The new machine is €120,000 but they’ll give him €40,000 as a trade in. Mark isn’t sure how the taxes work on this, so he calls into the office to see Reg. Reg puts him straight.
For capital allowances purposes there is only €5,000 left on the Massey. With the trade in for €40,000, there is a profit of €35,000. That is a balancing charge and the tax cost of that is
| €35,000 x 12.5% | €4,375 |
To avoid that charge Reg tells Mark that he can avail of the Replacement Option. Rather than suffering a balancing charge the cost of the new tractor can reduce by the amount of the charge.
| Cost of new tractor | €120,000 |
| Less balancing charge | €35,000 |
| Revised cost | €85,000 |
| Capital allowances at 12.5% | €10,625 |
| Value of allowances at 12.5% | €1,328 |
The company avoids paying the CT on the balancing charge so there’s a saving of €4,375. The balancing charge is effectively spread over 8 years.
No balancing charge arises where the sales proceeds or trade in value is less than €2,000. And remember if there’s a loss on the sale of an asset you can get a balancing allowance. That increases your capital allowances claim.
Salary/Bonus
It’s worth a brief mention of salary or bonus. We looked at that in greater detail in the last blog we did. The main message is to be aware of the 6-month timeline, from the end of your accounting year, to pay a bonus. Once you do that you can get a deduction for it in the prior accounting period. This should result in CT savings.
File on time
File on time, every time. That’s key and it can be painful when you don’t. This can lead to a surcharge and restriction of losses too. When liabilities are high the surcharges are more painful as they apply to the tax liability. Although there are caps on the amount of the surcharge the caps are not small numbers either.
Surcharges that apply are
- 5% of the tax subject to a max of €12,695 where the return is less than 2 months late. Be careful about the date as that date runs from the 21st of September. You have until the 21st of November 2023 to stay within the 5% rate for 31 December 2022 year ends or
- 10% of the tax subject to a cap of €63,485 where the return is later than 2 months after the due date
Losses Restriction
For companies, there will also be a restriction on the offset of losses if you file your CT return late. The value of those is
- Where the filing delay is less than 2 months there is a 25% restriction in losses and reliefs subject to a cap of €31,740 and
- When the filing delay is more than 2 months the restriction is 50% of the losses with a cap of €158,715.
Using the example of Small Tech Ltd and assuming it filed its CT return more than 2 months late for 2022. The loss restriction is 50%. In 2022 it could only use 50% of the trading losses to offset on a value basis against the rental profit
| Tax liability on Rental Profit | €12,500 |
| Restricted losses €75,000 x 12.5% | €9,375 |
| Tax liability | €3,125 |
For us as advisors it’s vital that we don’t miss the iXBRL filing deadline of 3 months from the due date for the CT return. There is no warning system for this, and the preference would be to go to the UK system. You can’t file the CT return in the UK without filing iXBRL accounts at the same time.
Do you want to make sure your company is as tax efficient as possible? If so, Start here
