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Operating a business in the UK, or any other part of the world, can be a very challenging experience. Not only must businesses fight with their competitors to keep their place in any given market/ industry, they also need to ensure that they meet all of their obligations to employees and regulators. Most governments understand that having a healthy economy relies upon businesses being able to succeed. Almost all businesses operating in the UK, will be liable to pay Corporation tax at some point. The UK Government recognises that a young businesses' corporate tax liability can be a heavy financial burden, and so look to lessen the burden by providing for a variety of reliefs and allowances that they can take advantage of.
The problem arises for businesses who are liable to pay corporation tax, when it comes to trying to identify what reliefs and allowances they are entitled to use, and equally important, how to apply them. The point of this article is to introduce some of the reliefs and allowances that those businesses liable to pay corporation tax can use, and how these tools can be used to reduce the tax liability of organisations.
Corporate tax reliefs and allowances are available for use by those businesses that are liable to pay corporation tax. Those organisations that are usually liable to pay corporation tax are (i) limited companies; (ii) companies based outside the UK, but have a 'permanent place of business' inside the UK; (iii) groups of people who carry on a business together other than a partnership; (iv) unincorporated associations; and (v) charities.
The UK Government has created a number of different tools that organisations operating in the UK can use, to help reduce or alleviate their liability to pay corporation tax. The reliefs/ allowances that a business can use can in some cases be quite general, and relate to general business activities. There are more specific reliefs which are available, and these are used by the UK Government to encourage businesses operating in a particular way or in a certain area of industry.
Most young businesses tend to begin operations while making a loss. This is often found to be the case for most organisations worldwide, as they attempt to identify potential customers and position themselves effectively within the marketplace. The UK Government uses what it calls 'Loss Relief', contained within the Corporate Tax Act 2010, as a mechanism to delay the paying of corporation tax for a fixed period.
'Loss Relief' will only be available where an organisation is making a loss in its operations. If the business has made a loss through trading, or through the sale of some of its assets, or even through a loss in income from property it owns, it may be able to take advantage of 'Loss Relief'. The relief from having to pay tax comes in the loss being offset against any other profits or gains that the business makes within that same period of trading – this will be the particular accounting period that the loss happens. Organisations have a choice;
When an organisation chooses to carry a loss forward, it is using that loss to reduce profits that will come from the same trade that will happen in future accounting periods. It is important to note that, this is only available to use with trading profits – it doesn't apply to chargeable gains. Organisations do not need to do anything in order for a trading loss to be carried forward. Provided that the business has filed its tax return at the correct time, the loss will be carried forward automatically.
When an organisation chooses to carry a loss backward, it will have the loss offset against the profits that the business enjoyed from the previous 12 months. It is important to remember that this is only possible if the business was carrying on the same trade – that it has made a loss in – in the previous 12 months. It is also important to bare in mind that the business must notify HMRC if it wants to carry a loss backward.
Business will buy different assets to enhance the services/ goods that they offer. As a result, the Government offers some relief for those business – subject to certain criteria – allowing them to write off the cost of purchasing assets against the income the business makes. Where a business buys an asset e.g. a car or machinery to use in providing its services, it will not be able to account for this expenditure from its trading profits. Instead, it will claim a 'Capital Allowance'.
There are different criteria for different things which a business may have as an asset in its operation. The following are some of those which are generally the most important for businesses;
This refers to those assets that a business buys and uses in its day-to-day activities that, in law, is called 'Plant and Machinery'. 'Plant and Machinery' can include lots of things – cars, tools, furniture. However, before an asset will count as 'Plant and Services', and its expense claimed for as a 'Capital Allowance', the following criteria need to be met;
This concerns those components of a building that a business could claim 'Plant and Machinery' relief for as a Capital Allowance, reducing their corporate tax liability. There are two main categories that can be quite useful for young business to consider investigating;
Fixtures in buildings
It may be possible for the business to claim 'plant and machinery' allowance/ relief for the funds it has spent on certain fixtures in a building that are used for business purposes. If a business buys/ sells a property that contains fixtures e.g. heating systems – this could be claimed for. In order to do this, the seller will need to agree with the buyer what part of the purchase price corresponds to those fittings, which must then be noted down in a 'Joint Election' and issued to HMRC within two years of the date when ownership of the property changed. This allows HMRC to keep note of what has been claimed by the seller of the premises in terms of Capital Allowances.
Integral Features of a building
A business may also be able to claim 'Plant and machinery' allowance/ relief for specific assets of the business – called integral features – that are in use for the purpose of the business. It is important to remember that businesses cannot attempt to use this relief if the integral features are in a 'dwelling house' – a house for someone to live in – that is let out as part of a business as either an ordinary UK property business, or an overseas property business. Examples of what is normally considered an integral feature include electrical systems; lifts; escalators; and cold water systems. The business will be able to claim 'plant and machinery' allowance on both; (a) the initial expenditure on the integral feature; and (b) any replacement expenditure where all of, or more than 50% of the integral feature is replaced within 12 months of its purchase.
There are two kinds of relief that companies involved in R&D could look to benefit from, but these apply to certain activities carried on by the business.
R&D Relief is only available for what HMRC call 'revenue expenditure'. This relates to everyday running costs. Small businesses tend to be attracted the 'Small and Medium Sized Enterprise (SME) Scheme', which allows for 225% tax relief on allowable R&D costs. In order to take advantage of R&D relief, an organisation must pursue R&D with a view to advancing the overall knowledge in a field of science or technology by providing a resolution to a problem.
HMRC operates very stringent criteria for those organisations looking to benefit from R&D relief. Detailed guidance is provided on www.hmrc.co.uk on these criteria. It is important to note that, businesses must set out for HMRC why they should benefit from this relief, in answering the following questions;
R&D as a capital expense is dealt with differently to general R&D. This is a kind of allowance (RDA). 'Capital Expenditure' is best though of as money spent with a view to creating a future benefit for a business. It is important to remember that this R&D allowance will only be available where R&D is carried out, that is related to the business of the trader – what the business 'trades' in. Examples of what could be covered under the R&D allowance include where a business buys a laboratory with a view to letting its employees engage in research. It is important to remember, that if a company has to buy land on which to house a laboratory, the price of the land will not fall within this allowance.
The rate of RDA for qualifying R&D currently stands at 100%. However, it should be noted that claiming this relief often warrants particular knowledge and skills. HMRC provide a detailed list of what those looking to benefit from this allowance need to consider, and the relevant offices to contact when looking to make use of the RDA.
The UK Government has introduced certain measures which those businesses actively engaged in innovation may be able to take advantage of, with a view to reducing their corporation tax liability. One of the most important measures is called 'The Patent Box'.
The 'Patent Box' is a product of the UK Governments aim to encourage investment in the economy. The point of this relief is to limit the tax that organisations actively involved in the exploitation of certain intellectual property (IP) rights pay on the profits they receive as a result of this exploitation. The government will only require that, those organisations benefitting from this relief, pay 10% on the net income they receive from exploiting these IP rights in taxation.
Only those businesses that are liable to pay corporation tax, and who receive profits from their works that are covered by patents will be able to take advantage of this relief. The business must own the patents in question, normally issued by the UK Intellectual Property Office or the European Patent Office, and have pursued 'qualifying development' on them. 'Qualifying development' means that the business must hold a qualifying 'IP Right'. This means that the business has either made a major contribution to the development of the invention that is covered by a patent or a product that incorporates that patented invention. There are other criteria to be met for those business who may come to enjoy patents through licensing agreements or other more complicated arrangements, before they will enjoy this kind of relief. HMRC provides detailed guidance on the necessary criteria to be satisfied.
Small business may which to license their inventions, for which they hold a patent over, to other organisations to develop – development of inventions can be expensive for small organisations with no guarantee of a return. Where an organisation uses others' technology under a license agreement, 'Patent Box' relief may still be available. However, the following conditions must be met;
It is important to note that not all of a businesses' profits will come from exploiting inventions that are covered by patents. In order for the income to be relevant, and deemed 'IP income', it must fall under one of the following headings;
Any business looking to take advantage of this scheme will have to identify how much of its profits have come from patent exploitation.
In attempting to calculate the profits that a business receives from exploiting patents, HMRC asks business to consider the following principles;
Following on from these general principles, HMRC then requires to use one of two methods in calculating the profits that can benefit from the property box. The choice of method that businesses can use depends on particular circumstances. The HMRC website should be consulted for detailed guidance.
Nothing in this guide is intended to constitute legal advice and you are strongly advised to seek independent advice on matters that affect you.