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, depending on whether your business is a company.
From 1 April 2023, companies investing in qualifying plant and machinery qualify for a 100% first-year allowance for main rate assets meaning they can write off the full cost in the year of investment. From 1 April 2021 to March 31 2023, capital allowances were temporarily boosted with a 130% first-year allowance.
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 most 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.
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:
- patents
- “know-how”
- research and development
Allowable expenses
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 to small companies (typically those with fewer than 500 employers) on qualifying research and development (R&D) costs for accounting periods beginning before April 2024. 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 an extra corporation tax relief from trading profits. Loss-making companies may be able to claim a tax credit. The rules vary for large companies.
You must complete an online Additional Information Form giving details of any R&D claim, before submitting your corporation tax return. If you do not do this, your claim will be invalid.
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.
Loss relief
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 can claim a higher credit rate of 14.5% for qualifying expenditure. Businesses qualify as R&D intensive if R&D expenditure is at least 40% of total expenditure, or at least 30% for accounting periods beginning on or after 1 April 2024.
