When it comes to calculating your company’s Corporation Tax liability, there are certain items of expenditure which can be deducted when calculating taxable profit and other items of expenditure which is disallowed for tax.
Knowing what your company can and cannot deduct from its profits for tax purposes is important as fundamentally it will reduce the amount of tax payable. When considering an asset purchase, it can often be a good idea to consider the timing of the purchase so capital allowances can be claimed in the company’s year-end – this is the first point covered below.
The general rule is that the expense needs to be wholly and exclusive for purposes of the business / trade:
Generally speaking, depreciation (mentioned below) is not an allowable expense for tax purposes. Instead, capital allowances are deducted from profit to replace the depreciation in the accounts. We currently have a temporary annual investment allowance (100% deduction on qualifying expenditure) limit of £1,000,000. From 1 January 2022, this will reduce to annual limit will reduce to £200,000. The idea of the annual investment allowance is to encourage investment in qualifying business assets such as plant, machinery and office furniture
The super-deduction was introduced on 1 April 2021 and will run until 31 March 2023. The new rules will benefit companies only investing in qualifying new plant and machinery. This is an extra 30% deduction compared to the annual investment allowance described above. The asset must be a new asset, not second hand.
From April 2021, companies can receive first year allowances (100% deduction) on brand new cars purchased with zero emissions, i.e. a fully electric car.
It’s important to note that the purchase of other company cars, will unlikely qualify for the annual investment allowance and that relief will be given at a rate of either 18% or 6% each period, depending on the CO2 emissions.
Research and development
For SME’s, where R&D takes place, there is an additional 130% relief that can be claimed on certain costs when computing the company’s taxable profits. This is designed to encourage innovation within the UK.
As an example, say £50,000 of costs during the year, directly relate to R&D activities. Additional tax relief of 130% could be claimed (so a total of 230%) on those costs. With the corporation tax rate being 19%, this brings an additional tax saving of £12,350, an effective tax saving of 24.7%.
Staff entertaining is an allowable cost for tax purposes, provided there is no element which relates to client entertainment (see below). There may however be personal tax implications on the employees if the entertaining exceeds £150 (per person, per year) or is not open to all staff members. For example, a Christmas party held for staff would qualify.
Termination / redundancy payments
Certain types of termination / redundancy payments are allowable for tax purposes. However, the rules around this are quite complex, so please contact us if this applies to your business.
Wages that are accrued in the accounts (such as a bonus) are allowed a tax deduction so long as the amount is actually paid within 9 months of the year-end.
Expenditure on repairs can be deducted from a company’s tax liability provided there is no major enhancement to the item being repaired. For example, restoring a broken machine or redecorating the office.
A provision is included in the financial statements and allowed for tax if the conditions leading to the cost existed at the balance sheet date, it is probable that it will be paid and that a reliable estimate can be made. Any general provision such as a general bad debt provision would not be permitted.
If you write off a customer debt which is no longer recoverable a deduction is allowed for tax. This is only for specific customer debts.
The following expenses are NOT allowed as a Corporation Tax deduction:
As mentioned above depreciation is disallowed (as this area of accounts is subject to judgement), capital allowances are allowed as a tax deduction instead.
If you incur expenditure on legal fees relating to capital expenditure, for example on the purchase of an investment property or on advice regarding shares, this expense is disallowed for tax purposes.
Expenditure on clothing is disallowed unless it is uniform which bears the company logo or is protective clothing.
Expenditure incurred on customer or supplier entertaining is not allowed for tax purposes. For example, taking your customer out for a meal.
Business gifts are not allowed for tax purposes unless it costs less than £50, it is neither food nor drink and it bears the business name. For example, stationary bearing the company logo.
Car lease costs
If the car the company is leasing has emissions which are more than 50g/km (for leases entered into after 1 April 2021) then 15% of the lease cost in the profit and loss account is disallowed for tax.
Fines / penalties
Any fines or penalties that the company pays will not receive a tax deduction. For example, a speeding fine.
Accrued pension contributions
Any pension contributions which the company pays during the accounting period is allowable, however if you decide to accrue for any pension contributions that the company pays for after the accounting period has ended, this is disallowed for tax purposes. For example, a company with a December 2020 year end has accrued for £5,000 of pension contributions for one of its Directors. The company pays the £5,000 in March 2021 following the year end. Although the £5,000 would be included as an expense in the 2020 accounts, it would only receive tax relief in the 2021 accounts.
Although salary costs are deductible for tax purposes, dividends are not.
If you have any questions about Corporation Tax, or would like further advice, please do get in touch and our specialist tax team will be happy to help you.