Q&A: Improve your tax efficiency

Finding ways to reduce your outgoings is not always easy, but keeping your business as tax efficient as possible is one way you might be able to save money without having to make cutbacks elsewhere

Chas Roy-Chowdhury, head of taxation at the Association of Chartered Certified Accountants, explains how limited companies can become more tax efficient.

Where should I begin?

Chas Roy-Chowdhury (CRC): "As a limited company, you might be able to reduce the amount of corporation tax you pay [on your profits] by taking advantage of all tax allowances available to you. To make the most of these, make sure your asset [such as plant and machinery] and overhead expenses are listed in your profit and loss account, otherwise you won't get tax deductions on them."

What allowances are there?

CRC: "You can't count the full cost of purchasing equipment or improving premises as an expense. Instead, you have to claim a capital allowance, which is then offset against your profits in the same way as an allowable expense.

"Capital allowances range from zero to 100 per cent, depending on the nature of your business and what you're purchasing. For example, there are 100 per cent allowances on energy-saving measures or environmentally beneficial equipment. And you can claim a 25 per cent [50 per cent in your first year] allowance on investments in plant and machinery.

"From April 2008, however, first year capital allowances will be replaced by an Annual Investment Allowance of £50,000, and capital allowance on plant and machinery will fall to 20 per cent."

Can I claim for research?

CRC: "Providing you spend £10,000 or more on R&D in an accounting period, you can claim R&D tax credits on qualifying spending at 150 per cent. This means you can offset £150 against your profits, for every £100 you spend on R&D. Tax credits apply to the costs of staff and consumables used in your R&D work."

How can I make the most of allowances?

CRC: "Try to make expensive purchases towards the end of your accounting period, so you can write them off. This will minimise disruption to your cashflow, because you can claim your allowance sooner."

What about VAT?

CRC: "If you're VAT-registered, you'll normally be able to reclaim VAT on purchases you make for your business - so called 'input tax'. Bear in mind, if you're not VAT-registered, you can claim capital allowances on the VAT charged on any equipment you buy."

And company vehicles?

CRC: "If you're planning to buy a new company car, buy a fuel-efficient model with a smaller-sized engine. There is now a higher band of Vehicle Excise Duty [VED] for the new, most-polluting cars registered after 22 March 2006, set at £210 per year for petrol cars. VED rates for cars with the very lowest carbon-emission bands have been cut to zero.

What about employees?

CRC: "It won't save you only money, but you should also consider offering childcare vouchers to employees. For example, you might pay a nursery £200 directly to cover an employee's monthly childcare bills. This amount is then deducted from their salary. This means the employee pays less tax and National Insurance, so their money goes further than if they had paid for the childcare directly."