If you run a business in the UK as a company, one of your responsibilities is to pay corporation tax. However, if you meet certain conditions (for example, if you purchase assets that you will use in your business), you may be able to claim certain corporation tax reliefs and allowances.
Capital allowances in the UK
Business expenses can be deducted from your income. However, this is not available when you buy assets such as machinery. Instead, you can benefit from capital allowances.
Capital allowances apply to the purchase of most equipment and machinery. In a few specific cases, you can also claim them on capital expenditure, such as property. Different types of expenditure qualify for different capital allowances.
Annual Investment Allowance (AIA) in the UK
If your capital expenditure is less than the Annual Investment Allowance (AIA), you can claim back the full amount as Capital Allowance in your first year of trading.
The AIA has been temporarily increased to £1 million. This threshold will apply from 1 January 2019 until 31 March 2023.
If your capital expenditure exceeds the Annual Investment Allowance, you can claim capital allowances each year to offset some of the costs.
Capital allowances under special rules
In some cases, special rules apply to capital allowances. The main ones are
- Company car allowance – the amount depends on the vehicle’s CO2 emissions,
- Allowances for short-term assets that will be used for a maximum of four years,
- Enhanced Capital Allowances – available for the use of green technology (up to 100% relief in the first year of operation),
- Patent Box – a tax break for companies using patented inventions and innovations. In this case, a lower corporate tax rate of 10% applies. The scheme will be phased in between April 2013 and April 2017.
Other corporation tax reliefs
There are a number of other corporation tax reliefs that can help reduce your tax liability
1. R&D – Research and Development
This relief allows you to deduct research and development expenses from income and claim an additional 125% (225% in total) corporation tax relief.
2. Marginal relief
Intended for companies with profits between £300,000 (the small profits tax threshold) and £1.5m (the main corporation tax threshold). This corporation tax relief means that the rate of tax gradually increases as the company’s profits increase, up to the main corporation tax threshold.
3. Group relief
Allows a company that is part of a group to transfer incurred losses and set them off against the profits of another company in the same group.
4. Relief for loss making companies
In this case, corporation tax relief allows you to:
- Deduct losses from other income (e.g., investments),
- Deduct losses from past profits,
- carry forward losses and offset them against future profits.
Corporation tax relief may also be available if the company gives employees the right to buy company shares at a price below their market value, or if the company makes charitable donations.
Expenses deductible from profits
Corporation tax reliefs and allowances are not the only benefits. It’s also worth mentioning the possibility of deducting ordinary business expenses from profits. You can take advantage of this as long as the expenses are necessary and used wholly and exclusively for business purposes.
There are a few exceptions to this rule, mainly entertainment expenses (such as staff parties) and expenses incurred during the start-up phase – for example, work clothing for employees.
It’s best to seek the help of an accountant to determine exactly which expenses are deductible and which are not (e.g. work clothes are a deductible expense, but a suit is not).
You are also entitled to deduct pension contributions paid by you as an employer to a pension scheme. However, this is only allowed if the amount of the contribution is within the rules. For example, HMRC may challenge disproportionately high pension contributions for directors and shareholders. It’s therefore advisable to consult an accountant on this matter too.
