Which tax credits and reliefs is my business eligible for?
Writing for Business Advice, managing director at financial advisory firm Sable, Scott Brown, identifies the key tax credits and reliefs available to UK entrepreneurs.
The UK has been an enterprise hotspot for hundreds of years, and though the Brexit vote has caused a degree of uncertainty, the country remains a fantastic place to start a micro business.
If you have a good idea and a plan to implement it, the UK wants what you’re selling. In London and beyond, the UK’s entrepreneurial community is simultaneously vibrant, inclusive, and highly competitive – thanks in no small part to various tax credits and reliefs.
The value of these benefits is tough to overstate, though they come with certain caveats.
For one thing, you want to make sure you’re running a micro business as a limited company rather than as a sole trader.
While the upper bracket of income tax can be as much as 45 per cent, corporation tax is set at 20 per cent on all profits, and may decline further soon.
Of course, this isn’t the only tax advantage of launching a business in the UK. Several tax credits and reliefs may be available for you and your new company, and those detailed below only amount to a few.
Capital allowances can be deducted for certain assets used by your business. They save money by reducing your taxable income.
Though you can claim for expenses such as renovation and patents in practice, most qualifying assets fall into the “plant and machinery” category.
This category includes expenses such as equipment, machinery and business vehicles. You can deduct the full value of an item that qualifies for annual investment allowance (AIA) from your profits before tax.
Most plant and machinery expense qualify for AIA, which in 2016 is set at £200,000.
Research and development relief
If you’re accumulating significant research and development costs, the UK tax system allows for relief under certain circumstances. However, your project should advance the state of knowledge in your field – or a related field of science and technology – rather than simply the capabilities of your own company.
Research and development credits are allowable on 230 percent of your costs, but the process of applying and securing them can be complex and time-consuming.
They also can’t be claimed on expenditure related to capital assets – though in some circumstances, you can claim capital allowances for these costs.
In any case, consulting a professional financial advisor before beginning the application process will likely save you time and money.
Payments into pension plans
Tax relief is available for contributions to employee pension plans, but this isn’t an automatic process, and is, to some extent, at the discretion of your local tax inspector.
If you’re contributing to a registered pension scheme, however (and if you’re not, auto-enrolment certainly means you should be), you’ll almost definitely qualify.
As long as your payments are calculated as expenses, and made “wholly and exclusively for the purposes of your trade”, it’ll ordinarily be allowable and offset against your corporation tax bill.
So if you can pay directly into your employees’ pensions, it’s advisable to do so. With no national insurance contribution and a lower corporation tax, you may be able to save over a third in tax payments.
Again, these are only a few examples. You can receive tax relief on charitable donations, disincorporation, patents, and writing down allowances, amongst many, many more.
The above doesn’t even touch on the various industry-specific reliefs available, or the benefits available to employees – which include car allowances, uniforms, childcare schemes, and professional fees & subscriptions.
The UK may be leaving the EU soon, but it remains a land of opportunity for local and international entrepreneurs alike.
Scott Brown is managing director at financial advisor Sable
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