As your accountants and tax advisers, our job is to help ensure that you benefit from all the allowances and reliefs available to you. You will pay tax on your taxable profits, so a crucial element of tax planning is to claim all deductible expenses, many of which will be included in your accounting records.
In this article, we look at some of the most common expenses and allowances business owners could be entitled to. As you will see, it is crucial to take advice ahead of your plans, so that you are fully aware what tax relief you may be entitled to.
Working from home and travel expenses
If you are self-employed and conduct your business from home you can claim tax relief on part of your household expenses, including insurance, repairs and utilities. You may also be able to claim for the cost of travel and accommodation when you are working away from your main place of business, so you should keep adequate business records, such as a log of business journeys.
In addition to ensuring your accounts are accurate; these records may also be requested by HM Revenue and Customs. An appropriate computer package might be worth considering to aid concise and effective record-keeping. We work with various solutions that might suit your needs.
Invoice versus cash basis, and flat rate expenses
You may also wish to consider the voluntary cash basis for calculating taxable income for small businesses, which allows eligible self-employed individuals and partnerships to calculate their profits based on the cash that passes through their business.
Businesses are eligible if they have annual receipts of up to £150,000 and they will be able to continue to use the cash basis until receipts reach £300,000. This is something we would need to discuss with you in detail if you are eligible. Allowable payments include most purchases of plant and machinery, when paid, rather than claiming capital allowances.
Unincorporated businesses can choose to deduct certain expenses on a flat rate basis. However, this is worth discussing before opting for it, as the flat rates are not generous.
‘Capital allowances’ is the term used to describe the tax deduction we are able to claim on your behalf for capital expenditure such as business equipment. There are various capital allowances available:
Annual Investment Allowance (AIA)
The maximum annual amount of the AIA is £200,000. This means up to £200,000 of the year’s investment in plant and machinery, except for cars, is allowed at 100%. The AIA applies to businesses of any size and most business structures, but there are provisions to prevent multiple claims. Businesses can allocate their AIA in any way they wish. It is quite acceptable for them to set their allowance against expenditure qualifying for a lower rate of allowances (such as integral features) – you can read more about this below.
Enhanced Capital Allowances (ECAs)
In addition to the AIA, a 100% first year allowance is also available on new energy saving or environmentally friendly equipment. Where companies (only) have losses arising from ECAs, they may choose how much they wish to carry forward and how much they wish to surrender for a cash payment (tax credit is payable at 19% but subject to limits).
A separate ECA scheme is available for new electric and low carbon dioxide (CO2) emission cars (up to 50g/km from 1st April 2018) and new zero emissions goods vehicles (up to 31st March 2021 (corporates) or 5th April 2021 (others)). They still qualify for the 100% first year allowance, but do not qualify for the payable ECA regime.
Writing Down Allowance (WDA)
Any expenditure not covered by the AIA (or ECAs) enters either the main rate pool or the special rate pool, attracting WDA at the appropriate rate – 18% and 8% respectively. The special rate 8% pool applies to higher emission cars, long-life assets and integral features of buildings, specifically:
- Electrical systems (including lighting systems)
- Hot and cold-water systems
- Space or water heating systems, powered systems of ventilation, air cooling or purification and any floor or ceiling comprised in such systems
- Lifts, escalators and moving walkways
- External solar shading.
For most other plant and equipment, including some cars (see below), the main rate applies.
A WDA of up to £1,000 may be claimed by businesses, where the unrelieved expenditure in the main pool or the special rate pool is £1,000 or less.
The Enterprise Zones in assisted areas qualify for enhanced capital allowances. In these areas, 100% First Year Allowances will be available for expenditure incurred by trading companies on qualifying plant or machinery.
Cars do not qualify for the AIA. The rate available will depend on the CO2 emissions of the vehicle:
- As mentioned above, green vehicles with CO2 emissions under 50g/km qualify for the First Year Allowance, which gives 100% relief
- For cars bought with CO2 emissions exceeding 50g/km but less than 110g/km, the main rate of 18% applies
- Cars with CO2 emissions above 110g/km will be restricted to the special rate of 8%
When a building is bought for business use, no tax relief is given for the building itself until it is sold. The only tax relief that may be available on purchase/ construction would be for some plant elements contained within the building, e.g. air conditioning, subject to certain conditions. A joint election may need to be made with the vendor. Please contact us for further details and advice prior to any purchase or building project.
Research and Development (R&D) investment
Tax relief is available on R&D revenue expenditure incurred by companies at varying rates. The current rates of relief are as follows:
- For small and medium-sized companies paying corporation tax at 19%, the effective rate of tax relief is 43.7% (that is a tax deduction of 230% on the expenditure). For small and medium-sized companies not yet in profit, the relief can be converted into a tax credit payment effectively worth 33.35% of the expenditure
- An ‘above the line’ credit exists for large company R&D expenditure. This is known as the R&D Expenditure Credit (RDEC) scheme and the credit has increased from 11% to 12% for expenditure incurred on or after 1st January 2018. The credit is fully payable, net of tax, to companies with no corporation tax liability
- SMEs barred from claiming SME R&D tax credit by virtue of receiving some other form of state aid (usually a grant) for the same project may be able to claim under the large company RDEC scheme. An SME may also be entitled to the large company RDEC for certain work that has been subcontracted to it.
Involving your family
Provided it can be justified commercially, you can employ family members in your business. They can be remunerated with a salary, and possibly with benefits such as a company car or medical insurance. You can also make payments into a registered pension scheme.
Family members may also be taken into partnership, thereby gaining more flexibility in profit allocation. Taking your non-minor children into partnership and gradually reducing your own involvement as their contribution increases can be a very tax-efficient way of passing on the family business. Of course, you should be aware that this could put your whole family wealth at risk, if the business was to fail.
It is worth noting that HMRC may challenge excessive remuneration packages or profit shares for family members, so seek our advice first. In most cases, if you operate your business through a trading limited company, under current tax law you can pass shares on to other family members and thus gradually transfer the business with no immediate tax liability.
However, a tax saving for the donor usually impacts on the recipient, and you need to steer clear of the ‘settlements legislation’, so again, contact us for advice before taking any action.
How we can help
This article has highlighted just some of the allowances and deductions available to business. If reading this article has sparked some ideas about where your business should be spending in the forthcoming year, please make sure you seek professional advice before acting.
One of the key factors in tax planning is ensuring you consider the tax liabilities ahead in advance. Your local TaxAssist Accountant would be happy to discuss your plans in more detail and outline the possible allowances available to you.
By Jo Nockels FCCA
Last updated August 2018
Disclaimer: The information provided is based on current guidance (at date of publication) from HMRC and may be subject to change. Any advice shared here is intended to inform rather than advise. Taxpayer's circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this information, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.