Is your business making full use of tax reliefs?

• The UK offers a wide range of reliefs and incentives, some of which reduce a company’s taxable profits, while others are aimed at shareholders, investors or employees. 
• The main tax reliefs to consider are: capital allowances; R&D tax relief; group relief; and patent box.
• There are also valuable reliefs that sit outside the company’s own corporation tax position, such as business asset disposal relief.
• The key message is to think about tax reliefs when planning and making commercial decisions, rather than waiting until the year end.

At a recent event we hosted for finance directors and business owners, almost half when polled were either unsure or not confident that their business was taking advantage of all available tax reliefs and incentives.

This is unsurprising as in my experience many small businesses miss out on available reliefs, possibly saving them thousands each year. The UK offers a wide range of reliefs and incentives, some of which reduce a company’s taxable profits, while others are aimed at shareholders, investors or employees. 

Business taxes

For businesses, some of the main tax reliefs to consider include: 

• Capital allowances – providing tax relief on qualifying investment in equipment, machinery and certain property expenditure. The timing and classification of expenditure can affect the relief available, so significant investment is worth considering in advance. The Annual Investment Allowance (AIA) allows qualifying businesses to claim immediate tax relief on up to £1 million of eligible capital expenditure each year. Companies can also benefit from full expensing relief, which provides a 100% deduction for new and unused plant and machinery purchases. Capital allowances generally apply to office equipment, machinery, tools, certain business premises fixtures and commercial vehicles.
• R&D tax relief – is available where a company carries out a qualifying project that seeks an advance in science or technology and the project overcomes scientific or technological uncertainty. For companies subject to the 25% corporation tax rate, the merged R&D scheme can provide a net benefit of 15p for every £1 of qualifying expenditure. Claims now require detailed supporting information, making it important to identify qualifying projects and retain evidence as the work progresses. Eligible expenditure may include relevant staff costs, software, consumable materials, data and cloud computing costs, externally provided workers and certain subcontracted activities. Claims require detailed supporting information, so businesses should identify qualifying projects and retain evidence as the work progresses.
• Group relief – allowing qualifying losses in one group company to be offset against taxable profits elsewhere in the group, subject to the relevant conditions. It will not be relevant to every small business but should be considered where a business operates through more than one company.
• Patent Box – is an often-overlooked relief that allows companies to apply an effective 10% corporation tax rate to qualifying profits from patented inventions. A company may be eligible where it owns or exclusively licenses qualifying patent rights, has undertaken relevant development and earns profits from exploiting the patented product, process or related licence. Qualifying patents include those granted by the UK Intellectual Property Office, the European Patent Office and certain recognised European Economic Area patent offices.

Other opportunities may also be relevant depending on the nature of the business operations.

Many of these mainstream reliefs will be considered as part of preparing a company’s corporation tax return and used to reduce taxable profits or the resulting tax liability. However, that does not mean every available relief arises automatically. Claims, elections, supporting evidence and timing can all require active consideration so it’s wise to discuss these with your advisers.

Reliefs beyond the company’s corporation tax position

There are also valuable reliefs that sit outside the company’s own corporation tax position.

Business asset disposal relief (BADR) can reduce the rate of capital gains tax (CGT) on qualifying disposals of a business or shares, subject to a £1 million lifetime limit. The conditions generally need to be satisfied for at least two years, so they should be reviewed well before a proposed sale.

For businesses looking to raise equity finance, the Enterprise Investment Scheme (EIS) can provide valuable tax incentives to investors in qualifying companies. Similarly, Enterprise Management Incentives (EMI) can provide a tax-efficient way for qualifying businesses to reward and retain key employees through share options.

These reliefs can be particularly valuable, but they often require more forward planning than those routinely considered as part of the annual tax compliance process. 

Plan around commercial decisions

The key message is to think about tax reliefs when planning and making commercial decisions, rather than waiting until the year end.

Tax reliefs for company directors and employees

Company shareholders and directors should not overlook pension planning. Employer pension contributions can be a tax efficient way of extracting value from a business, with the company generally receiving corporation tax relief where the contributions are incurred wholly and exclusively for the purposes of the trade. Pension contributions can also benefit from tax relief for the individual, subject to the relevant annual allowance and other conditions.

Finally, don’t forget for a new business venture, you may also be able to obtain relief for certain costs incurred before trading begins. Depending on the nature of the expenditure, this may include qualifying professional costs, market research and capital allowances on equipment used in the business. Keep clear records and invoices so the available treatment can be considered when the business starts trading.

There are valuable tax reliefs available to businesses at every stage of their lifecycle. The key is to consider tax before making significant investments, recruiting or incentivising employees, raising equity finance or preparing for a sale. Early advice can help identify available reliefs, protect eligibility and ensure the necessary evidence is retained.

Sam Jones is a partner and head of corporate tax at Kreston Reeves.