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.
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 set at £1 million from 1 January 2019 until 31 December 2021, and is then expected to return to its normal level of £200,000.
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 have been temporarily boosted from 1 April 2021 to 31 March 2023. There is a 130% first year allowance, instead of an 18% writing-down allowance. Special rate purchases 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 Government introduced the Structures and Buildings Allowance (SBA) for new, non-residential structures and buildings on 29 October 2018. The SBA allows a deduction from profits at an annual rate of 3% in 2020/21 (previously 2%) calculated on the original construction expenditure.
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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 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.
- HMRC capital v revenue expenditure toolkit (PDF)
- HMRC capital allowances for plant and machinery toolkit (PDF)
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 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 and set against past or future profits or claim a cash tax credit. The rules vary slightly 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.
Visit the GOV.UK website to download the HMRC company losses toolkit (PDF).
This toolkit is designed to help tax agents, advisers and anyone completing a Company Tax Return, avoid the common errors relating to company losses.