Corporation tax reliefs and allowances are invaluable tools that empower businesses to minimise their corporation tax liability. By comprehending the various ways in which these provisions are treated, companies can strategically navigate the complex landscape of taxation.
The annual investment allowance, for instance, offers businesses the opportunity to make significant investments while simultaneously reducing their tax burden.
This allowance allows for the acquisition of essential assets and encourages growth without incurring excessive tax liabilities. Additionally, other capital allowances provide relief on a wide range of capital expenditures, such as machinery, equipment, and vehicles.
By understanding the treatment of these allowances, businesses can make informed decisions and optimize their tax planning. Moreover, allowable expenses can further contribute to reducing tax liability by deducting qualifying expenditures from taxable profits.
Therefore, grasping the nuances of corporation tax reliefs and allowances is essential for businesses seeking to minimize their tax liability and maximize their financial stability
Capital allowances and the annual investment allowance
When it comes to calculating your taxable profit, deducting business expenses is typically allowed. However, it’s important to note that purchases of assets such as machinery don’t fall under this category. Instead, you can make use of capital allowances.
Capital allowances come into play for most acquisitions of plant and machinery as well as business vehicles. The types of expenditures that qualify for capital allowances can vary.
Starting from April 1, 2023, until March 31, 2026, businesses that invest in eligible plant and machinery will be eligible for a remarkable 100% first-year allowance for main rate assets. This means they can fully write off the cost in the year of the investment.
For companies investing in special rate assets, including long-life assets, they will benefit from a 50% first-year allowance in the year of investment.
To the benefit of all businesses, including unincorporated businesses and partnerships, the annual investment allowance (AIA) provides 100% first-year relief for investments in plant and machinery, up to the generous AIA limit of £1 million.
In cases where the capital expenditure surpasses the annual investment allowance, capital allowances can still be claimed through writing-down allowances.
The rates vary:
- Claim 18% annually for most plant and machinery expenses, reducing your tax liability each year.
- Enjoy a special rate of 6% for long-life assets, integral features of buildings, and low-emission cars, maximizing your tax savings on these valuable assets.
- Temporary Boost Alert! From 1 April 2021 to 31 March 2023, indulge in a remarkable 130% first-year allowance, rather than the usual 18% writing-down allowance. Make the most of this limited-time opportunity for substantial tax relief!
- Keep the Momentum! Starting from 1 April 2023 until 31 March 2026, delight in a generous 100% first-year allowance, allowing you to write off the entire cost of eligible assets in the year of investment. Special rate purchases continue to benefit from a 50% first-year allowance
In certain instances, you have the opportunity to claim capital allowances specifically for capital expenditure related to premises. For instance, if you invest in adding insulation to your property, you can take advantage of this opportunity. The Structures and Buildings Allowance (SBA) is designed to benefit new non-residential structures and buildings, allowing you to deduct a portion from your profits each year. This deduction is calculated based on the original construction expenditure and applies at an annual rate of 3%.
Company cars and Capital allowances
In specific scenarios, unique capital allowances rules come into play. One such example is the capital allowances for company cars, which are determined based on the vehicle’s emissions level. Additionally, there are capital allowances for short-life assets that are anticipated to have a lifespan of no more than four years.
It’s important to note that cars do not qualify for the annual investment allowance (AIA). However, there is a provision to claim a remarkable 100% first-year allowance for zero-emissions cars, which can be quite advantageous.
Other assets which qualify for capital allowances
Capital allowances may also extend to other business costs that are classified as capital expenses rather than overheads, opening up eligibility for such expenditures.
These include:
- patents
- “know-how”
- research and development
HMRC capital allowances toolkits
Designed to assist businesses, tax agents, and advisers alike, these downloadable toolkits serve the purpose of offering valuable guidance on recognizing and avoiding the common errors that can arise when distinguishing between capital and revenue expenditure.
Allowable expenses
In general, ordinary business expenses can be utilized to offset profits, granted that the expense is deemed necessary and solely for business purposes. However, there are a few exceptions where certain expenses are not eligible for tax deduction, such as entertainment costs and professional fees associated with company formation.
On the other hand, tax relief can be obtained for charity or sponsorship payments. To navigate the precise boundary, it is advisable to consult with your accountant. For instance, while a staff uniform qualifies as an allowable expense, a suit does not.
Regarding employers’ pension contributions made to a registered pension scheme, they usually qualify as allowable expenses. Nonetheless, it is crucial to adhere to the principle that the level of contributions must be justifiable from a business standpoint.
For instance, if pension contributions for the benefit of shareholding directors appear disproportionately high, HM Revenue & Customs may scrutinize them. Given the significance of this aspect in personal tax planning, seeking professional advice is recommended.
Corporation tax reliefs
Numerous additional corporation tax reliefs exist to effectively minimize your overall liability for corporation tax.
R&D tax relief
Qualifying research and development (R&D) costs open the door to potential corporation tax relief. It’s worth noting that claiming R&D relief is not limited to those involved in groundbreaking technological advancements. This relief enables you to deduct R&D costs from your trading income and even secure additional corporation tax relief from your trading profits.
In the case of companies experiencing losses, this corporation tax relief can amplify their losses, which can then be offset against past or future profits, or alternatively, they can opt to claim a cash tax credit. However, it is important to acknowledge that the rules governing this relief differ for large companies.
Patent Box scheme (Intellectual Property)
- Companies benefiting from the ‘Patent Box’ scheme enjoy a reduced corporation tax rate of 10% solely on income derived from qualifying patents they own or hold an exclusive license to commercialize.
- To be eligible for this reduced tax rate, the profits must originate from various sources, including the sale or licensing of patent rights, sales of products incorporating a patented invention, income from intellectual property infringement, or compensation received for damages relating to patent rights.
- To take advantage of the ‘Patent Box’ scheme, it is essential to make an election within two years of the end of the accounting period associated with the profits, as part of your tax return.
Loss relief
Different avenues of corporation tax relief become accessible when your company faces a loss. This relief empowers you to offset losses against alternative income sources, such as investment returns or previous profits, as well as carry losses forward to offset future profits. Furthermore, group relief enables one company within a group to utilize its losses against the profits of another group member.
Starting from April 1, 2023, eligible small and medium-sized businesses with a substantial focus on research and development (R&D) and experiencing losses (where R&D expenditure accounts for at least 40% of total expenditure) can avail themselves of a heightened credit rate of 14.5% for qualifying R&D expenses.
To gain valuable insights and assistance in handling company losses, consider visiting the GOV.UK website to access the HMRC company losses toolkit. This comprehensive toolkit serves as a resource for tax agents, advisers, and individuals engaged in the completion of company tax returns, offering guidance to avoid common errors associated with company losses.
Read more: Late filing penalties for corporation tax
Conclusion
In conclusion, understanding and utilizing corporation tax reliefs and allowances is crucial for businesses aiming to minimise their tax liability and optimize their financial stability. These provisions offer various opportunities, such as the annual investment allowance, capital allowances for different assets, R&D tax relief, and the Patent Box scheme.
Additionally, allowable expenses and loss relief mechanisms provide further avenues for reducing tax liabilities. By leveraging these reliefs and allowances effectively, businesses can strategically navigate the complexities of taxation and make informed decisions to achieve their financial goals. It is recommended to consult with tax professionals and utilize resources like the HMRC toolkits to ensure accurate compliance and maximise the benefits of these tax provisions.
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.