A significant number of small businesses in the UK do not take full advantage of HMRC-approved...
A significant number of small businesses in the UK do not take full advantage of HMRC-approved or endorsed tax breaks. If implemented correctly these tax breaks could save a lot of money.
We have listed below some of the most valuable tax reliefs that are commonly available to small businesses and their owners.
The Employment Allowance allows eligible employers to reduce their National Insurance liability. The allowance increased to £4,000 (was £3,000) from 6 April 2020. An employer can claim less than the maximum if this will cover their total Class 1 NIC bill.
The allowance is only available to employers that have employer NIC liabilities of under £100,000 in the previous tax year. Connected employers or those with multiple PAYE schemes will have their contributions aggregated to assess eligibility for the allowance. The Employment Allowance can be used against employer Class 1 NICs liability. It cannot be used against Class 1A or Class 1B NICs liabilities. The allowance can only be claimed once across all employer’s PAYE schemes or connected companies.
Since April 2020, Employment Allowance claims will also need to be submitted each tax year. This means that relief will not automatically be applied to your account as was previously the case. There are currently a number of excluded categories where employers cannot claim the employment allowance.
Most day-to-day business expenses can be deducted from business income when calculating your taxable profits. However, the rules are different for capital expenditure.
‘Capital allowances’ is the term used to describe the allowances which allow businesses to secure tax relief for certain capital expenditure.
Most ‘capital’ items, such as computer equipment, vehicles, machinery, etc. last for more than a year or so. The tax rules do not allow you to automatically deduct the full cost of such items in one go. Different rules apply to different types of capital expenditure. In some cases, no tax relief is available at all even though you may have spent the money solely for business purposes.
One of the most commonly used capital allowances used by small businesses is the Annual Investment Allowance (AIA). This is a generous tax relief that allows for the total amount of qualifying expenditure on plant and machinery to be deducted from your profits before tax.
The AIA can be claimed by an individual, partnership or company carrying on a trade, profession or vocation, a UK non-residential property business or a furnished holiday let. Only partnerships or trusts with a mixture of individuals and companies in the business structure are unable to qualify for AIA.
The AIA was permanently set at £200,000 for all qualifying expenditure on or after 1 January 2016. However, this limit has been temporarily increased to £1 million from 1 January 2019 to 1 January 2022. This increased temporary limit is a generous allowance and should cover the annual spend of most small and medium sized businesses.
The AIA is available for most assets purchased by a business, such as machines and tools, vans, lorries, diggers, office equipment, building fixtures and computers. The AIA does not apply to cars. A claim for the AIA must be made in the period the item was bought.
Where the AIA is not available, businesses can claim First-Year Allowances (FYA) of 100% in the year they purchase certain plant or machinery. As with the AIA this allows businesses to deduct the whole purchase cost of qualifying assets from their taxable profits.
For plant and machinery expenditure that exceeds the AIA and which does not qualify for a FYA, a standard 18% Writing Down Allowance is available. This is based on the cost of the items in the year they are acquired.
Small Business Rate Relief
Business rates are charged on most non-domestic premises, including most commercial properties such as shops, offices, pubs, warehouses and factories. Some properties are eligible for discounts from the local council on their business rates. This is called business rates relief. There are a number of reliefs available including small business rate relief, rural rate relief, and charitable rate relief.
The business rates retail discount in England was increased to 100% in 2020-21 for the retail, leisure, hospitality and nursery sectors as a result of the coronavirus pandemic. The business rates in Scotland, Wales and Northern Ireland are set by the devolved administrations.
SME R&D Tax Relief
The Research and Development (R&D) tax credits scheme offers businesses the ability to invest in new technologies and scientific development in exchange for generous tax reliefs. Businesses investing in R&D projects can benefit from a significant reduction in their Corporation Tax bill.
Small and Medium-sized Enterprises (SME) can claim R&D tax credits of 230% on qualifying expenditure. This effectively means that for every £100 a company spends on qualifying R&D, they can deduct £230 from their profits when calculating profits chargeable to Corporation Tax. For loss-making companies using the SME scheme, the tax credit is fully payable (subject to certain restrictions) as a tax refund.
SMEs can elect to claim relief under the less generous R&D Expenditure Credit (RDEC) Scheme if they are unable to claim relief under the SME scheme because of a grant or subsidy, or because they are carrying out subcontracted R&D work.
The rules as to what qualifies in this regard are complex. In general, however, a project qualifies as R&D if:
- It seeks to achieve an advance in science or technology.
- The research is relevant to the business.
- The business is of a trading nature as distinct from someone working in a profession or vocation.
Creative Industries Tax Reliefs
Creative Industries Tax Relief (CITR) are a collection of Corporation Tax reliefs that allow qualifying companies to claim a deduction in their taxable profits.
The CITR applies to qualifying expenditure in the production of certain films, high-end television, animation, video games, children’s television, theatre, orchestra and ‘museum and galleries’ exhibitions.
Where a company makes a loss, they may be able to surrender their losses for a payable tax credit. It is also possible to claim the relief retrospectively which could result in a repayment of Corporation Tax for a previous year.
Most of the CITRs are available at 25% of qualifying UK expenditure. The Tax Relief is capped at 80% of the core expenditure which means that even if you have 100% UK-qualifying expenditure, tax relief is only payable on a maximum of 80% of qualifying costs. For most reliefs, there is no cap on the amount which can be claimed.
The cost of a staff party or other annual entertainment is generally allowed as a deduction for tax purposes. If you meet the various criteria outlined below then there is no requirement to report anything to HMRC or pay tax and National Insurance. There will also be no taxable benefit charged to employees.
- An annual Christmas party or other annual event offered to staff generally is not taxable on those attending provided that the average cost per head of the function does not exceed £150.
- The event must be open to all employees. If a business has multiple locations, then a party open to all staff at one of the locations is allowable. You can also have separate parties for separate departments, but employees must be able to attend at least one of the events.
- There can be more than one annual event. If the total cost of these parties is under £150 per head, then there is no chargeable benefit. However, if the total cost per head goes over £150 then whichever functions best utilise the £150 are exempt and the others taxable. Note, the £150 is not an allowance and any costs over £150 per head are taxable on the full cost per head.
- It is not necessary to keep a running total by employee but a cost per head per function. All costs including VAT must be taken into account. This includes the costs of transport to and from the event, food and drink and any accommodation provided.