Tax is one of the trickiest areas of running a business. It can be a bewildering, complicated area, particularly for those without specialist training. Maintaining records and filing returns requires a lot of work. And at the end of it (assuming your business is profitable) you can have a sizeable bill.
No business owner enjoys paying tax, but most accept it as part of life. You would like to pay less. The whole area of tax relief and tax breaks opens the door to a new set of rules. It is added complexity you could do without. In other words, it’s a Pandora’s Box, and many would just as soon leave it alone.
Claiming the business relief and allowances that are available to you, however, is a simple way to keep your business tax efficient. It reduces your nominal profit, which in turn reduces your Corporation-Tax payments. By claiming all the relief, allowances, and expenses that you are entitled to, you are making sure you do not pay a penny more in tax than you have to.
Every year, millions of pounds’ worth of tax relief goes unclaimed by British firms. These are financial incentives designed to give businesses a helping hand.
To be sure of which areas apply to your particular business, you should discuss the matter carefully with your business accountant. Meanwhile, we’ve provided a headline summary of four reliefs that could potentially reduce your Corporation-Tax bill this year.
Annual Investment Allowance (AIA)
AIA is a capital allowance, which provides tax relief on money you invest in your business. AIA covers general equipment purchases. Most types of plant and machinery are eligible, excluding cars.
Businesses can deduct the full amount of qualifying purchases from their profits before tax, up to a maximum ceiling for each business-accounting period. In a 12-month accounting period falling between 1st January 2020 and 31st December 2020, you can deduct up to £1 million in capital purchases. This lowers your tax on your declared profits.
If you go on to sell equipment you have claimed relief on, you may have to pay back the tax deducted.
Note, though, that the government plan to cut AIA to £200,000 from 1st January next year.
Assume your business has profits of £1.5 million. If you spend £300,000 on plant and machinery for your business, currently, the full amount can be subtracted from your profits, reducing them to £1.2 million. You only pay Corporation Tax on £1.2 million.
The Energy Technology List (ETL) is a government list of energy-efficient plant and machinery. In order for a product to be listed, it must meet the ETL’s robust energy-saving criteria - typically set at the top 25% of energy-efficient products for that category in the market. The ETL can be paired with accelerated tax relief, such as the Annual Investment Allowance.
For Class 1 National Insurance contributions, Employment Allowance can offer important savings of up to £4,000 per year.
A business cannot claim if both of the following apply:
- you’re a company with only one employee paid above the Class 1 National Insurance secondary threshold
- the employee is also a director of the company
So, your business will be able to claim Employment Allowance, even if you only have one employee earning more than the secondary threshold – just so long as he/she is not a director.
Employment Allowance allows eligible employers to reduce their annual National Insurance liability by up to £4,000.
You can claim Employment Allowance if you’re a business or charity (including community amateur sports clubs) and your employer’s Class 1 National Insurance liabilities were less than £100,000 in the previous tax year.
You’ll pay less employer’s Class 1 National Insurance each time you run your payroll until the £4,000 has gone or the tax year ends (whichever is sooner).
You can only claim against your employer’s Class 1 National Insurance liability up to a maximum of £4,000 each tax year. On the other hand, if your liability was less than £4,000, you’ll still be eligible to claim.
R&D Tax Relief for a Small to Medium-Sized Enterprise
SMEs in Britain typically overlook the tax relief available through investment in Research and Development. Two thirds of eligible companies have failed to claim since the scheme was introduced a decade ago.
Only 1% of eligible companies are currently claiming the tax relief. Reports suggest that claims for UK SMEs for R&D tax relief range between £43,000 – £62,000. There are approximately 3.5million SMEs actively trading in the UK, with 57% of them eligible for R&D tax credits. Of the 57% eligible, only 1% have claimed the relief.
Even if the R&D in question has already been completed, it may still be possible to claim, as the relief can be backdated by a maximum of two years.
Of all types of tax discount currently available in Britain, R&D relief is probably the most generous. It allows companies to deduct up to 130% of qualifying expenses from profits before tax. For every £100 spent on R&D, the government allows your business to deduct up to £130. SMEs can deduct an extra 130% of their qualifying costs from their yearly profit, as well as the normal 100% deduction, to make a total 230% deduction.
You can claim R&D tax relief if you are a SME with:
- fewer than 500 staff
- a turnover of under €100m or a balance sheet total under €86m
Bear in mind, though, that your firm’s SME status may be affected if you have external investors. You may need to include the figures of connected companies and partner companies when you work out if you are an SME.
Research and Development (R&D) reliefs support companies that work on innovative projects in science and technology. It can be claimed by a range of companies that seek to research or develop an advance in their field. It is designed to encourage innovation and creative, responsible risk taking, and can even be claimed if projects are unsuccessful.
In fact, companies can claim relief even if their plans never see the light of day. The main thing is that you can demonstrate a genuine effort to improve products, processes or services. And companies who fail to make a profit can claim R&D tax relief, in the form of a tax credit of 14.5% of the declared loss.
Projects that count as R&D
The work that qualifies for R&D relief must be part of a specific project to make an advance in science or technology. Unfortunately, advances in theoretical fields, such as pure maths, or in the social sciences, such as economics, do not qualify for this relief.
The project must relate to your company’s trade - either an existing one, or one that you intend to start up based on the results of the R&D.
To get R&D relief you need to explain how a project:
- looked for an advance in science and technology
- had to overcome uncertainty
- tried to overcome this uncertainty
- could not be easily worked out by a professional in the field
The R&D may focus on improving an existing service, process or product, or it might aim to create a wholly new one.
Small Business Rates Relief
Any small company may qualify for a discount on business rates if it owns a property with a rateable value under £15,000.
You will not pay business rates on a property with a rateable value of £12,000 or less.
For properties with a rateable value of £12,001 to £15,000, the rate of relief will go down gradually from 100% to 0%.
If your rateable value is £13,500, you will get 50% off your bill. If your rateable value is £14,000, you will get 33% off.
Businesses that use only one property can qualify, but using more doesn’t necessarily mean you’re not eligible. When you get a second property, you will keep getting any existing relief on your main property for 12 months.
The government has decided that no business rates for the tax year 2020-21 will be levied on companies within England in the hospitality, leisure and retail sectors. .
You are eligible if your property is a:
- restaurant, café, bar, or pub
- cinema or live-music venue
- assembly or leisure property - for example, a sports club, a gym or a spa
- hospitality property - for example, a hotel, a guest house or self-catering accommodation
How to apply
Your local council will implement the discount automatically, so you needn’t do anything yourself.
You can estimate the business-rate relief using the business rates calculator.
Contact your local council if you are not getting a relief you think you are entitled to.
It’s always worth checking to see if you’re eligible for business tax relief, as it can make a major difference to your bottom line. Your accountant should be able to point you towards some possible options. And if you want an impartial second opinion, contact one of the Capital team today.