Imagine you’re a consultancy business with a few staff. After receiving tax efficient investment funds under SEIS (not available to large companies) you purchased top quality computer equipment for £80k for your staff to use and spent £120k on research & development into groundbreaking consultancy software.
Your profit for last year was made up of:
Sales £400,000
Costs (£220,000) (£120k R&D + £100k salaries/other costs)
Depreciation (£20,000)
PROFIT £160,000
If you know the corporation tax rate is 20%, you might expect your company tax bill should be £32,000.
However, a few adjustments are required to know how much tax you should pay.
Profit £160,000
Depreciation £20,000 (Ignored for tax purposes)
AIA (£80,000) (Capital allowances which replace the Depreciation – 100% of the computer equipment cost)
R&D (£156,000) (Tax enhancement available to small businesses)
TAX LOSS (£56,000)
Your profit of £160,000 has become a tax loss of £56,000! You’ve become a tax avoider!
This and other tax avoidance is perfectly legal.
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