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
Capital allowances and the annual investment allowance
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 and business vehicles. Different types of expenditure qualify for different capital allowances.
From 1 April 2023 until 31 March 2026, businesses investing in qualifying plant and machinery will qualify for a 100% first-year allowance for main rate assets meaning they can write off the full cost in the year of investment.
Companies investing in special rate (including long life) assets will benefit from a 50% first-year allowance in the year in which they make the investment.
The annual investment allowance (AIA), provides 100% first-year relief for investments in plant and machinery up to the AIA limit of £1 million, benefiting all businesses including unincorporated businesses and partnerships.
For capital expenditure over the annual investment allowance, capital allowances are claimed as writing-down allowances. The rates vary:
- You can normally claim 18% for the cost of most plant and machinery each year.
- A lower ‘special rate’ of 6% applies to long-life assets, integral features of buildings and low-emission cars.
- Capital allowances for companies were temporarily boosted. From 1 April 2021 to 31 March 2023, there is a 130% first-year allowance, instead of an 18% writing-down allowance.
- From 1 April 2023 to 31 March 2026, there is a 100% first-year allowance. Special rate purchases continue to qualify for a 50% first-year allowance.
In a few specific cases, you can claim capital allowances in relation to capital expenditure on premises, for example, by adding insulation. The Structures and Buildings Allowance (SBA) for new, non-residential structures and buildings allows a deduction from profits at an annual rate of 3% calculated on the original construction expenditure.
Capital allowances and company cars
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. Cars don’t qualify for the AIA, but you can claim a 100% first-year allowance for zero-emissions cars.
Other assets which qualify for capital allowances
Other business costs treated as capital rather than overheads may also be eligible for capital allowances. These include:
- research and development
HMRC capital allowances toolkits
These downloadable toolkits are aimed at helping businesses, as well as tax agents and advisers, by providing guidance on the common errors that can occur in identifying capital or revenue expenditure.
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 where the expense is not allowable against tax including entertainment and professional fees for company formation. However, you can get tax relief for charity or sponsorship payments. 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.
Corporation tax reliefs
A number of other corporation tax reliefs can help reduce your corporation tax liability.
R&D tax relief
Corporation tax relief is available on qualifying research and development (R&D) costs. You do not have to be developing or creating leading-edge technology to claim R&D relief. This R&D tax relief allows you to both deduct these costs from your trading income and claim up to an extra corporation tax relief from trading profits. Loss-making companies can use this corporation tax relief to increase their losses and set against past or future profits or claim a cash tax credit. The rules vary for large companies.
Patent Box scheme (Intellectual Property)
- Under the '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 profits must come from patent rights you sell or license, sales of patented products or products containing a patented invention, intellectual property infringement income or damages or compensation relating to your patent rights.
- You must make an election in your tax return within two years of the end of the accounting period to which the profits relate.
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.
From 1 April 2023, eligible R&D intensive loss-making small and medium-sized businesses (those where R&D expenditure is at least 40% of total expenditure) will be able to claim a higher credit rate of 14.5% for qualifying expenditure.
Visit the GOV.UK website to download the HMRC company losses toolkit.
This toolkit is designed to help tax agents, advisers and anyone completing a company tax return, avoid the common errors relating to company losses.