Becoming as tax efficient as possible should be a high priority for every business owner.
Whatever the size of your operation, or its annual turnover, tax efficiency can free up extra resources to grow and develop your business.
Working towards greater tax efficiency will have a positive impact, enabling you to lay strong foundations for future success.
But what practical measures can you take now to ensure your business is as tax efficient as possible?
Mileage allowance
Any business that has significant travel costs can improve its tax efficiency by claiming mileage allowance.
HMRC allows businesses to claim tax relief on mileage expenses that are incurred during business-related travel. The scope of this can be broad, and includes journeys made by the employees using their private vehicles for work purposes.
Taking full advantage of mileage allowance requires accurate record-keeping. Mileage and any associated expenses should be recorded, and businesses should have a streamlined system for tracking and reporting mileage.
Many companies use direct fuel chargeback to compensate employees for expenses incurred while using their private vehicles on company business.
Switching to mileage allowance streamlines the administrative burden and provides a fair and consistent reimbursement structure that’s easy for employees and employers to understand.
At DAAFL, we can help ensure you’re taking advantage of this potentially generous tax allowance as part of your drive towards greater tax efficiency.
Land Remediation Relief
Land Remediation Relief is a tax incentive developed to encourage companies to clean and redevelop contaminated land.
This will often be brownfield land that was previously used for industrial purposes.
Businesses that undertake this cleanup and regeneration work can benefit from significant tax relief. To qualify, land in question should require remediation due to industrial activity, and the planned work should aspire to bring it back to a usable state.
Land Remediation Relief provides a 100 per cent deduction of corporation tax, plus an additional deduction of 50 per cent for qualifying expenditure that companies incur during the clean-up process on land acquired in a contaminated state from a third party.
For land or buildings to be considered in a contaminated state as a result of industrial activity, the contamination present should be:
- Causing relevant harm, or there is a serious possibility that it could cause relevant harm
- Causing, or there is a serious possibility that it could cause, significant pollution in the groundwater, streams, rivers or coastal waters.
The definition of “relevant harm” includes significant adverse impact on the health of humans or animals or damage to buildings that impacts on the way the building is used.
Qualifying expenditure includes the cost of establishing the degree of contamination and removing or containing the contamination.
This work should remove the possibility of relevant harm being caused. No relief will be applied if the essential remediation work is not carried out.
Qualifying capital expenditure must be deducted when calculating taxable profits within two years of the end of the accounting period in which the expenditure is incurred.
DAAF works with companies to ensure they claim any Land Remediation Relief they may be entitled to.
R&D Tax Credits
Research and Development (R&D) Tax Credits are a valuable tax incentive for businesses engaged in research and development.
The UK government provides allows businesses to claim tax relief or cash credits against qualifying R&D investments and expenditures.
R&D Tax Relief is applied to a specific project that must be aimed at making an advance in the fields of science or technology.
The project must relate to your company’s trade, either an existing one or one that you intend to start based on the results of the R&D.
To make a successful claim for R&D relief you will need to explain how your project:
- looked for an advance in the field
- had to overcome the scientific or technological uncertainty
- tried to overcome the scientific or technological uncertainty
- could not be easily worked out by a professional in the field
Your R&D project may be researching or developing a new process, service or product, or may offer a tangible improvement on a current one.
To qualify for R&D tax credits, companies must thoroughly document their activities and expenses.
DAAF works with companies of different sizes engaged in a range of R&D projects to ensure they maximise any allowances they may be entitled to.
Maximising capital allowances
Capital allowances are integral to developing tax efficiency. These enable businesses to deduct the cost of certain assets from their taxable profits, reducing the amount of corporation tax that your business will be liable to pay.
Capital allowances can be claimed on any items that are kept to use within your business.
These are known as ‘plant and machinery’. In most cases, the full cost of ‘plant and machinery’ can be deducted from company profits before tax is liable using the annual investment allowance.
Sole traders and partnerships with an income of £150,000 or less can make use of a streamlined system called cash basis.
Items that can count as plant and machinery include:
- Any items that are kept to be used in a business’ this can include cars and other vehicles
- The cost of demolishing redundant plant and machinery
- Parts of a building that can be considered ‘integral features’; these can include lifts and escalators, air conditioning systems, electrical systems, and hot and cold water systems
- Fixtures; these can include fitted kitchens, bathroom suites, fire alarms and CCTV systems
Things that cannot be claimed include items that are used only for business entertainment purposes and land structures like bridges.
Capital allowances can be complex to understand and are liable to change.
Working with experienced financial professionals like those at DAAF can ensure your business is taking full advantage of any capital allowances to which you may be entitled.
Maximising capex and super deduction
Capital expenditure (or capex) is money spent acquiring or upgrading an asset such as land, equipment or a building.
Capex is made on any assets that you intend to be of long-term benefit to your business. A good example of this might be IT equipment that is going to be used in the business and will not be sold within a year.
Capital expenditure is recorded on the balance sheet under ‘Assets’ rather than on the income statement.
Capital expenditure differs from operating expenditure (opex) in how long the asset will be used. Any assets that are bought to use and make money over a longer period will be categorised as capex, with purchases made for the daily running of the business being classified as opex.
Operating expenditures will include expenses like payroll, insurance, utilities and marketing.
Capital expenditure is divided into maintenance capex and growth capex.
Maintenance capex is spent on replacing assets to sustain your current level of operations, revenue and profitability. For instance, this might include replacing a key piece of equipment such as machinery used in the production processes or logistics.
Growth capex, on the other hand, is money that you spend to grow your business, increasing revenue and profitability. This might include extra machinery to increase production capacity, or to expand your business into new markets. In this instance, you would be supplementing existing machinery and equipment rather than replacing existing equipment.
While replacing a failing piece of equipment could be considered essential, purchasing new machinery to increase production is a discretionary expense.
Super Deduction was a two-year scheme that provided UK businesses with an unprecedented opportunity to boost their tax efficiency.
*Between April 2021 and March 2023, any investments a business made in main rate plant and machinery were eligible for a 130 per cent capital allowance deduction.
This includes assets that would typically qualify for the main rate allowance.
While the qualifying period has now ended, any investments in plant and machinery that were made during that period may still be eligible for the 130 per cent capital deduction.
Maximising capital expenditure and taking advantage of any related schemes is a key element of achieving maximum tax efficiency.
Salary sacrifice
Salary sacrifice schemes provide a tax-efficient way for employees to receive non-cash benefits in exchange for an agreed reduction in their overall salary.
These can include a variety of different schemes, such as cycle-to-work, childcare vouchers, or enhanced pension contributions.
For employers, salary sacrifice schemes reduce National Insurance contributions, and there are tax savings for employees on the sacrificed salary.
Salary sacrifice schemes need to be carefully structured to ensure mutual benefits for both parties.
Employers also need to clearly communicate the details of the scheme to ensure compliance with tax regulations. Salary sacrifice schemes should provide understood benefits for both a company and its employees.
Salary sacrifice schemes can be used as a positive way to enhance working culture as well as to achieve greater tax efficiency.
Pension contributions
Employer contributions to employee pension schemes provide a valuable employee benefit and a tax-deductible expense for the business.
When businesses contribute to employee pension schemes, companies reduce their corporation tax liabilities.
Additional employer pension contributions may be offered to employees as a salary sacrifice scheme, further reducing tax liability for both employer and employees.
Pension contributions should form a key part of achieving tax efficiency for your business.
Improving your tax efficiency with Digital Accounting & Finance
At DAAFL, we work with companies of all sizes to ensure they’re tax efficient, providing expert, insightful, and actionable advice to companies in the North West of England and across the UK.
DAAFL brings fresh ideas and strategies to your company finances. Our experienced team of small business tax accountants will enable you to take advantage of any allowances, develop tax efficiency, and take the hassle out of your annual accounts.
When you partner with DAAFL, you can focus on developing your business confident in the knowledge that your finances are in safe hands.
Contact us for further advice on maximising your tax allowances and ensuring tax efficiency.