Corporate Tax Planning

A growing business must decide HOW to structure new activities: as DIVISIONS (branches within an existing company) or as SEPARATE SUBSIDIARIES (each a distinct legal entity).

Divisions within a single company:

• All profits and losses netted automatically
• Single CT computation — simple, low admin
• One CT band allowance (£50k-£250k) — full bands available
• All activities exposed to each other's risks (single legal entity)
• Cannot ring-fence capital (e.g., sell one division without selling the whole entity)

Separate subsidiaries (75% group):

• Each subsidiary has its own CT computation and returns
• CT bands DIVIDED among 51% group members — can increase overall effective rate
• Losses can be GROUP RELIEVED between 75% group companies (current year + b/f, subject to £5m + 50% restriction)
• Intra-group asset transfers at no gain/no loss (s.171 TCGA)
• Can sell subsidiaries individually (SSE applies if 10%+ shares held 12+ months in last 6 years in trading companies)
• Ring-fence risk — creditors of one subsidiary generally can't reach another
• Higher administrative costs (multiple companies to run)

Decision criteria:

Key tax insight — band sharing disadvantage:

If a company is split into 4 subsidiaries (4 x 51% group members), the £50k and £250k CT thresholds are divided by 4: each subsidiary has £12,500 small profits band and £62,500 main rate band. Far less favourable than a single company with £50k and £250k bands. The splitting can DRIVE UP the effective CT rate across the group, especially if activities would have fit within the single-entity thresholds.

Commercial factors often decisive:

• Liability ring-fencing: particularly important for risky new ventures, property-holding companies
• Exit flexibility: a subsidiary structure allows sale of individual businesses
• External investors: may prefer to invest in a specific subsidiary (JV structure)
• Different regulation: separate subs may be needed for regulated activities (financial services, healthcare)

Conversion between structures:

• Division → subsidiary: typically requires incorporation of the business (INCORPORATION relief s.162; intra-group reorganisation provisions)
• Subsidiary → division: would require transferring assets and trade up to parent; can use s.171 for no-gain-no-loss transfers within 75% group
• Both directions need careful stamp taxes, VAT, and direct tax planning

Group relief — CT planning:

Current year losses:

• Trading losses, NTLRDs, and excess QCDs can be SURRENDERED between 75% group companies
• Use immediately if possible — tax saving at 25% (or 26.5% marginal) vs carrying forward
• Match profit years against loss years: planning the TIMING of loss realisation can shift tax between periods
• Consider loss surrendering entity (surrenderor) vs claiming entity (claimant) — same group but different tax years possibly

Brought-forward loss planning (post-April 2017):

• B/f trading losses, NTLRD, property losses, non-trading IFA can be group-relieved (since April 2017)
• BUT: subject to LOSS RESTRICTION — £5m deductions allowance per group + 50% of profits above £5m
• Deductions allowance shared among group companies; the designated "nominated company" determines allocation
• PLANNING: Optimise which group company uses the £5m allowance — usually the one with highest profits
• If total group profits < £5m per year: no restriction applies — free to fully use b/f losses

Worked example — group loss planning:

Group of 3 companies in 2024/25:

• A Ltd: profits £4m
• B Ltd: profits £3m
• C Ltd: loss (current year) £2m, plus brought forward losses £8m

Optimal plan:

• Surrender C's current year loss £2m to A (or B) as group relief — save CT £500k (25%)
• C has remaining b/f £8m. Can surrender to other members. Total group profits after CY loss: £7m − £2m = £5m (if surrendered to A and uses the full loss).
  • Wait — surrendering C's £2m current year loss to A: A's profits drop to £2m. Plus B profits £3m, C profits £0. Combined = £5m.
  • Use C's b/f £8m against remaining profits: £5m deductions allowance × 100% + 50% of remaining £0 = £5m of b/f used (exactly covers remaining profits)
  • Group tax: £0. Remaining b/f: £3m carried forward.

Alternative: if profits had been higher (say £10m total), restriction would bite: £5m allowance + 50% × £5m = £7.5m usable; £2.5m taxable.

VAT grouping:

• UK bodies corporate under common control can register as a single VAT entity
• Ignored intra-group supplies → eliminates "sticking VAT"
• Single return, single registration number
• JOINT AND SEVERAL LIABILITY

When VAT grouping helps:

• Mixed groups (some exempt members — banks, insurers, property investment): VAT grouping eliminates sticking VAT on services provided BETWEEN taxable and exempt group companies. Major benefit.
• Large internal flows: simplifies administration, reduces cashflow
• Shared services: group centre billing subsidiaries without VAT hassle

When VAT grouping may NOT help:

• Fully taxable group with no material intra-group supplies: no benefit
• If one group member has high exempt supplies: partial exemption % applies to the WHOLE GROUP (can reduce recovery for all members)
• Joint and several liability: exposed to any member's VAT debts

Consortium relief:

• Company owned by 5 or fewer companies, each 5%+, total 75%+ (e.g., joint venture)
• Losses can be surrendered between consortium and members (or between members of the consortium company) in proportion to ownership
• Useful for joint ventures where < 75% held by any one member
• Combined with group relief if one member also has a 75% group

Most owner-managed companies are close companies (controlled by 5 or fewer participators or participator-directors). Special rules apply to prevent abuse.

Avoiding s.455 tax on loans to participators:

• s.455: 33.75% TEMPORARY tax on loans to participators outstanding 9 months + 1 day after period end
• Refunded 9 months after repayment period end
• Key: REPAY before the trigger date
• Avoid "bed and breakfast" repayments (repay and re-draw within 30 days — caught by anti-avoidance)

Planning approaches:

1. Avoid the loan entirely: use salary, dividends, or commercial lending instead
2. Time the repayment: repay before 9 months + 1 day from period end
3. Convert loan to dividend: if repayment not possible, formally declare a dividend equal to the loan (clears the loan + creates a formal tax-paying dividend)
4. Use a directors' loan account credit balance: if director has previously loaned money to the company, they can draw against that credit — not a participator loan
5. Interest on loan: paying interest at official rate (2.25%) avoids a separate BIK — may be simpler than s.455 management

Benefits vs dividends vs salary — owner-manager trade-off:

Benefits vs dividends — the niche cases:

• Electric company car: 2% BIK rate; 100% FYA on purchase; employer NIC 13.8% on BIK. For a £50k electric car: BIK £1,000 × 40% HRB = £400 IT; employer NIC £138. Compare extracting £50k as dividend: £50k × 33.75% = £16,875. Major saving.
• Mobile phone: one exempt phone provided by employer — saves personal cost of a phone
• Workplace nursery: fully exempt, saves significant personal cost

Timing of dividend declarations:

• Dividends taxable in the YEAR DECLARED AND PAID
• If owner has other income making them additional-rate in current year, DELAY dividend to next year when they're basic/higher-rate
• Or: decide not to take excess dividends — leave in company at 19/25% CT (might become available at lower personal tax rate later or at sale under BADR)
• "Asset stripping" by drawing down reserves close to exit: can bring forward distribution to use BADR (10%) rather than future dividend rates

The total employment cost includes: salary + employer NIC + pension contributions + benefits. Minimising these together minimises cost.

Understanding employer NIC cost:

• Employer NIC 13.8% on salary above £9,100 (secondary threshold)
• Employment Allowance £5,000 waives first £5,000 of employer NIC (eligibility: multiple employees; NOT single-director companies since 2016)
• For every £1 of salary above £9,100, the company pays an additional 13.8p in NIC
• Gross up effect: to give an employee an extra £1, the company spends £1.138

Alternatives to salary (all avoid employer NIC):

1. Employer pension contributions: no employer NIC; CT deduction; no IT/NIC to employee
2. Salary sacrifice (post-2017 restrictions): employee swaps salary for benefits. Only SOME benefits still get tax savings since the 2017 optional remuneration arrangements (OpRA) rules:
   • Still beneficial (exempt from OpRA): pension contributions; childcare vouchers (legacy); cycle-to-work; ultra-low emission cars (< 75g/km)
   • No longer beneficial: company cars (except electric), gym memberships, mobile phones (1 phone exempt outside sacrifice), accommodation, medical insurance
3. Benefits in kind: specific items can be tax-efficient (electric cars, cycle-to-work, eye tests, staff parties ≤ £150/head)
4. Bonus timing: accrue in one CT year, pay within 9 months after year-end — CT deduction in accrual year

Bonus deductibility rule:

• Bonuses accrued in accounts deductible for CT ONLY if actually paid within 9 months of end of accounting period
• Otherwise: deduction in year of payment
• Valuable timing opportunity: accrue in high-profit year; deliver to individuals in next year

Worked example — remuneration decision:

TechCo wants to reward its COO with an extra £10,000 benefit. Consider:

Ranking (for cash extraction): Pension > Salary > Dividend. Pension best for value accumulation (if long-term). Electric car: very efficient for a real need. Dividend last for new extraction (but useful to use existing retained profits).

Double benefits from pension:

• CT relief for company at marginal rate (19%-26.5%)
• No income tax for employee
• No NIC (employer or employee)
• Grows tax-free in scheme
• 25% tax-free at retirement
• Effective rate of tax on compensation paid as pension: close to zero (if 25% drawn tax-free; rest at retirement rate 20% or less)

Capital allowances shelter taxable profits. Effective planning can accelerate tax savings.

Full expensing — the most valuable regime (for companies):

• 100% first-year allowance on NEW, UNUSED main pool P&M
• Permanent from April 2023; no annual cap
• Ideal for: manufacturing equipment, computers, office equipment, vehicles (excl. cars), most plant
• Special rate pool items (insulation, long-life assets): 50% FYA with remaining 50% going to pool
• EXCLUDED: cars, items for leasing (mostly), second-hand items
• On disposal: BALANCING CHARGE of full proceeds (because 100% was claimed)

Timing planning:

• Bring forward capital expenditure into the current year to accelerate deduction
• Particularly valuable when profits are in MARGINAL BAND (£50k-£250k) at effective 26.5% rate
• If profits are already below £50k, deferred deduction may be more valuable (future profits may be in 25% bracket)
• Contract vs delivery date: for FYAs/full expensing, usually EFFECTIVE DATE is when unconditional contract signed or delivery — check specific rules

AIA allocation — special rate pool first:

• AIA £1m per year (shared among 51% group companies)
• If spend exceeds £1m, AIA gives 100% relief up to the limit
• Beyond AIA: main pool 18%, special rate pool 6% WDA
• RULE: ALLOCATE AIA TO SPECIAL RATE POOL FIRST (lower WDA otherwise)
• Example: £300k main pool + £500k special rate pool. AIA £1m remaining. Allocate £500k to special rate pool (save 6% WDA) + £500k to main pool (uses £500k of AIA). Main pool remaining £0. All items fully expensed.
• If AIA allocation had been wrong: £500k main pool expensed via AIA + £500k to SRP. SRP without AIA: 6% × £500k = £30k WDA in year 1; then declining reducing balance. Tax deferred not accelerated.

Short-life asset (SLA) election:

• For assets expected to be disposed of within 8 years of acquisition (end of 8th anniversary year)
• Election keeps asset in its OWN SEPARATE POOL, not the main pool
• On disposal: BALANCING ALLOWANCE (or charge) immediately crystallises
• If no SLA election: disposal proceeds just reduce the main pool (no immediate balancing adjustment)
• Valuable when asset is expected to be sold for LESS than its TWDV — get balancing allowance instead of slow WDA

Structures and Buildings Allowance (SBA):

• 3% per year straight-line on new non-residential buildings
• Claim over 33⅓ years — long period, modest annual benefit
• No balancing adjustment on sale, but SBA already claimed is ADDED BACK to cost for CGT
• Planning: don't forget to claim — total value of SBAs over the 33 years can be significant (e.g., £5m building → £150k SBA per year)

Private use assets (for sole traders, not relevant for companies):

• Not applicable to companies — company can't have "private use" (the car is used by a director who is taxed on BIK, but the company gets full allowances)

Worked example — capital allowances strategy:

Manufacturing company, year to 31 March 2025. Planned expenditure:

• New manufacturing machinery (main pool): £1,500,000
• New thermal insulation (special rate): £400,000
• Second-hand forklift: £80,000
• New commercial building: £2,000,000

Optimal strategy:

1. New machinery (main pool, £1.5m): qualifies for FULL EXPENSING — 100% FYA, no cap. Claim full £1.5m.
2. Thermal insulation (special rate, £400k): does NOT qualify for full expensing (SRP only gets 50% FYA). Use AIA instead — allocate to SRP (£400k of £1m AIA) for 100% relief.
3. Second-hand forklift (£80k): full expensing NOT available (second-hand). Use remaining AIA: £1m − £400k = £600k AIA still available. Allocate £80k. 100% relief.
4. Commercial building (£2m): claim SBA at 3% = £60k per year.

Year 1 total capital allowances: £1,500,000 + £400,000 + £80,000 + £60,000 = £2,040,000. Tax saving at 25%: £510,000.

Two of the most valuable incentives for companies undertaking innovation in the UK.

R&D relief planning — general principles:

• Ensure qualifying activity is clearly identified and documented
• Ensure qualifying expenditure categories are captured (staff, subcontractors at 65%, consumables, software/cloud, data, power)
• File claim within 1 year of normal CT filing deadline (2 years from end of AP)
• Advance assurance available for small companies (first claim) — reduces risk

Choosing between SME and RDEC schemes:

When an SME must use RDEC:

• Subcontracted work (SME carrying out work for another company receiving the benefit)
• SME received subsidies or grants affecting the qualifying expenditure
• Connected party subcontracting rules in some cases

Merged scheme (from April 2024):

• Unified 20% above-the-line credit for all companies (accounting periods starting 1 April 2024+)
• Essentially RDEC-style for everyone
• Additional uplift for R&D-intensive SMEs (≥ 30% R&D/total expenditure)

Maximising R&D claims:

1. Identify ALL qualifying projects — not just "big" R&D. Many product improvements qualify if they involve scientific/technological uncertainty.
2. Capture ALL qualifying expenditure — staff costs (direct + employer NIC + pension), software, cloud costs, subcontractors (65% inclusion), consumables
3. Apportion correctly where staff split between R&D and other activities
4. Maintain contemporaneous records (project documentation, time sheets)
5. Consider advance assurance for certainty

Recent changes:

• SME enhanced deduction reduced from 230% to 186% from April 2023
• SME payable credit reduced; R&D-intensive higher rate preserved
• Overseas R&D restrictions (from April 2024 for some activities — UK-only qualifying expenditure)
• Data and cloud computing added as qualifying categories from April 2023
• Merged scheme from April 2024

Patent Box planning:

• 10% effective CT rate on qualifying IP profits (vs 25% main rate)
• Deduction = Profit × (Main rate − 10%) / Main rate = Profit × 15/25 = 60% deduction
• Formal election required (by 12 months after the end of the first AP in which Patent Box applies)
• Election is REVOCABLE but must be considered carefully — interacts with R&D relief

Qualifying IP:

• Patents granted by UK IPO, European Patent Office, or EEA equivalents
• Supplementary protection certificates, plant varieties, regulatory data protection
• COMPANY MUST OWN or EXCLUSIVELY LICENSE the IP
• Development or active ownership conditions (must have contributed significantly to the IP's creation or development)
• NEXUS fraction: relief linked to actual R&D expenditure that created the IP (prevents "shell" IP holding)

Practical Patent Box claim steps:

1. Identify qualifying IP rights
2. Identify income from qualifying IP (royalties, notional royalties on product sales, damages, proceeds of sale of IP)
3. Apply the Patent Box income streaming calculation
4. Deduct routine return (routine profit from activities other than IP — 10% of routine expenses)
5. Apply the nexus fraction (R&D expenditure ratio)
6. Result = Patent Box profit eligible for 10% effective rate

Combined benefit:

• R&D costs eligible for enhanced deduction (186% under SME / 20% credit RDEC / merged)
• Resulting IP (if patented) → Patent Box 10% on future profits
• Ecosystem of incentives for UK-based innovation

CT quarterly instalments — thresholds:

• Augmented profits > £1.5m (per 51% group member) → QUARTERLY INSTALMENTS (large company)
• Augmented profits > £20m → EARLY quarterly instalments (very large)

Planning to AVOID quarterly instalments:

• Keep augmented profits below threshold per group member (if legitimate — not artificial fragmentation)
• For NEW 51% group members: becoming a member DIVIDES the threshold. 2 members: £750k threshold each; 3 members: £500k each; etc.
• Time capital expenditure: accelerate into the year to reduce taxable profits below threshold
• Time pension contributions to reduce profits
• Year 1 relief for new large companies: 12-month exemption in the first AP where they become "large" (smooth transition)

Payment date timeline:

Example 12-month AP to 31 March 2025:

• LARGE: 14 Oct 2024, 14 Jan 2025, 14 Apr 2025, 14 Jul 2025
• VERY LARGE: 14 Jun 2024, 14 Sep 2024, 14 Dec 2024, 14 Mar 2025 — ALL WITHIN THE AP

Cashflow impact of very large status: pays tax BEFORE knowing the full year's results — requires careful estimation. Over/under-payment rectified with later returns and interest.

IFA regime planning:

Goodwill and customer-related intangibles restrictions:

• Acquisitions from 1 April 2002: IFAs generally eligible for amortisation relief (follows accounting)
• From 8 July 2015: restrictions on goodwill and customer-related intangibles — NO relief on these (capital loss only on disposal)
• From 1 April 2019: Partial restoration of relief on ACQUIRED goodwill (linked to qualifying IP) — amortisation allowable up to 6x the value of qualifying IP acquired
• Planning: structure M&A to maximise relievable IFAs (brands, customer lists separately valued where possible)

4% fixed amortisation election:

• Election to use 4% straight-line amortisation INSTEAD of accounting amortisation
• Irrevocable election on asset-by-asset basis
• Typically useful when:
  • Accounting amortisation is very slow (IAS 38 — useful life 20+ years)
  • You want predictable, faster tax relief
• Accelerated relief from the election particularly valuable for a GOODWILL impairment scenario

IFA transfers within groups:

• Intra-group transfers of IFAs: no gain/no loss under s.775 CTA 2009
• Similar to s.171 TCGA for chargeable gains, but for IFAs specifically
• Transferee continues the transferor's tax position

Disposals of IFAs:

• Gains/losses are REVENUE (not capital) in the IFA regime
• Trading IFA: into trading income
• Non-trading IFA: non-trading surplus/deficit (similar to NTLRD)
• Reinvestment relief: gains on IFAs can be rolled over into replacement IFAs (similar to rollover relief for tangible assets)

Planning considerations:

• Distinguish carefully between IFAs (post-2002, revenue treatment) and older intangibles (pre-2002, CGT rules)
• Goodwill: expensive given restrictions — consider whether to acquire as shares (SSE) vs trade and assets
• Software: generally IFA or plant depending on nature — important for capital allowances planning