Corporation tax reliefs and allowances help you to minimise your corporation tax liability. It's worth understanding the different ways in which the annual investment allowance, other capital allowances and allowable expenses are treated.
Business expenses can normally be deducted from your income when calculating your taxable profit. But purchases of assets (eg machinery) are not allowable. Instead, you claim capital allowances.
Capital allowances can be claimed for most purchases of plant and machinery. In a few specific cases, you can claim capital allowances in relation to capital expenditure on premises, for example, by adding insulation. Different types of expenditure qualify for different capital allowances.
If your total capital expenditure is less than a specified annual investment allowance (AIA), you can (in general) claim the full amount as a capital allowance in the first year. The AIA is £200,000 from 1 January 2016.
For capital expenditure over the annual investment allowance, capital allowances are claimed as writing-down allowances, allowing you to claim a percentage of the cost each year.
Special capital allowances rules apply in some cases. These include the capital allowances for company cars, which depend on the car's level of emissions, and capital allowances for short-life assets expected to last no more than four years. Enhanced capital allowances are available for a few environmentally friendly technologies, allowing you to claim up to 100% in the first year.
Under the new 'Patent Box' scheme, companies with income attributable to qualifying patents which they either own or have an exclusive licence to commercialise, only pay 10% corporation tax on that income. The 'Patent Box' scheme is being phased in between April 2013 and April 2017. Businesses electing to benefit can apply the 10% reduced rate to the appropriate percentage of relevant profits starting at 60% in April 2013 increasing to 100% of relevant profits in April 2017.
Ordinary business expenses can generally be set against profits, provided the expense is necessary and is wholly and exclusively for business purposes. There are a few exceptions, including entertainment and professional fees for company formation. Your accountant can advise you on where exactly the line is drawn, for example, a staff uniform is an allowable expense, but a suit is not.
Employers' pension contributions made to a registered pension scheme generally are an allowable expense, but the same rule applies: the level of contributions must be justifiable in business terms. For example, HM Revenue & Customs might question disproportionately high pension contributions for the benefit of shareholding directors. As this can be an important area for personal tax planning, you should take advice.
A number of other corporation tax reliefs can help reduce your corporation tax liability.
Corporation tax relief is available on qualifying research and development (R&D) costs. This R&D tax relief allows you to both deduct these costs from your trading income and claim up to an additional 130% (230% in total) as a corporation tax relief to be deducted from trading profits. Loss-making companies can use this corporation tax relief to increase their losses or claim a cash tax credit.
Until April 2015, companies with profits between £300,000 (the limit for paying tax at the small profits rate) and £1.5m (the main corporation tax threshold) could claim marginal relief. This relief meant the tax payable gradually increased as profits rose towards the main threshold. The small profits and main rates of corporation tax have now been aligned at 20%.
The Chancellor has announced that Corporation tax will drop to 19% in 2017 and again to 17% in 2020.
Different corporation tax relief is available if your company makes a loss. This corporation tax relief allows losses to be set against other income (eg from investments) or past profits, or carried forward to set against future profits. Group relief allows losses made by one company in a group of companies to be set against the profits of another group member.
Corporation tax relief can also be available if employees are allowed to buy shares in the company for less than their market value, or if the company makes gifts to charity. As with other corporation tax reliefs, capital allowances and so on, your accountant can help you make full use of these in your corporation tax return.