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I am an IT contractor in the UK and want to invest surplus cash to avoid corporation tax.

What I can invest in without changing my company's status?

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  • Clarification: Are you talking personal taxation (income tax) or corporation tax? – marktristan Sep 29 '16 at 13:07
  • corporation tax – Mert Sep 29 '16 at 13:19
  • Cool, in that case I can't answer but have suggested an edit to the question so that others will. Thanks – marktristan Sep 29 '16 at 13:21
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    @Mert English lessons might actually be a tax-deductible expense for an IT contractor :) – Philipp Sep 29 '16 at 13:49
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    How will you a avoid corporate tax by investing? If you invest, all you are doing is moving assets around; you aren't actually expensing anything, so your net income remains the same. (This is how it works in Canada at least; I did the same with my corporation). – tendim Sep 29 '16 at 14:39
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avoid corporation tax

There aren't many avenues to save on corporation tax legally. The best option you can try is paying into a generous pension for yourself, which will save some corporation tax.

Buying a house

You can claim deduction for the mortgage payments, but profits on selling the house will require paying capital gains tax on the profit. You can rent it out, this will be decided between your mortgage provider and your company, but the rent will go towards as income.

Buying a car

Not worth it. You will have to pay Class 1A NI contribution for benefits in kind. Any sane accountant will ask you to buy the car yourself and expense the mileage.

Any income generated from the cash you have is taxable. Even the interest being paid on your money is taxable.

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  • this will do, I don't want to pay taxes now. Its okay for me to posponde those taxes until sale of the house. thats work for me if this is possible. my goal is to buy a house which returns rent as much as tax free dividend cap. so I will get tax free dividend and wont need to work. – Mert Sep 30 '16 at 13:38
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lets sat If I buy a house on company's name, It will declared as expense and will deduct from profit. but I am not sure If I can rent it out as a IT LTD company. that's my questions.

Buying a house is not an expense, it is a transfer of assets. The house itself, is an asset. So if you have $100,000 in cash, buy a house for $35,000, your total assets will remain the same ($100,000), but your asset mix will be different (instead of $100,000 in cash, you now have $65,000 in cash, and $35,000 in property).

You can expense the costs associated with buying the house (e.g. taxes, interest, legal fees), but the house itself stays on the asset side of your balance sheet. To refine the example above, if you buy the house for $35,000, and pay $5,000 in misc fees related to purchasing the house, your assets are now $95,000 ($60,000 in cash, $35,000 in house): the $5,000 reduction is from the actual fees associated with the purchase. It is these fees that lower your profit.

Being not familiar with UK rules, in Canada and the US, and likely the UK, you would then depreciate the house over its useful life. The depreciation expense is deducted from your annual net income.

If you rent out the house, what you can do is expense any maintenance fees, taxes, etc., on the house itself. This expense will count as a negative towards the rental income, lowering your effective taxable income from the rental. E.g. rent out a flat at $1,000/month, but your property taxes are $3,500/year, so your net income for tax purposes (i.e. your taxable income in this case) is $12,000-$3,500=$8,500.

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  • so I can't deduct cost of house from my profit. how about car? or something else? – Mert Sep 29 '16 at 16:07
  • I would talk to a tax professional and/or an accountant. But my experience is that cars, houses, stocks, are all assets, and they can only be capitalized (e.g. recorded as an asset, and then depreciated over time). There indeed be situations where you can "expense" an "asset". A quick search yielded some results when I searched for "accounting expense vs asset". But talk to an accountant; it could save you several headaches and legal issues down the road. – tendim Sep 29 '16 at 17:01
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    Expensing assets is probably only possible to the extent that the asset depreciates from company related use. So the limo with a hot tub in the back isn't going to be an expense for an IT company without really stretching the truth. But a work truck would. Leases for depreciating assets are key for corporate expenses. But I'm from the US and everything is different here. Get an accountant, locally. You'll likely need to pay them a consulting fee, but they can help you set up ways to provide added value within your company while lowering tax liability. – Xalorous Sep 29 '16 at 17:48
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The only way to avoid paying the corporation tax is buying a house for say $100,000 and then letting it burn down by accident. So your money is gone without anything to show for it, your profits are gone, and you pay no corporation tax.

You pay corporation tax on profits. Profits that you invest are still profits.

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