Business Tax Rates Explained

In this series of articles, we are explaining tax rates and allowances. Following on from our last article about employment tax rates, benefits and expenses, in this article, we explain business tax rates such as Value Added Tax, corporation tax and business tax reliefs.

Value Added Tax (VAT)

Most goods and services are subject to VAT in the UK. If your sales exceed the VAT registration threshold in a twelve-month period, you must register for VAT and charge VAT to your customers. If you supply goods or services overseas you may need to comply with VAT rules in the country where your supply is being made. International VAT rules are complex, so please speak to us so we can help you remain compliant in this area.

For VAT purposes, the provision of goods and services can either be taxable supplies or exempt supplies. You must charge your customers VAT on taxable supplies, at a standard, reduced or zero rate, based on the nature of the supply. You do not charge VAT on exempt supplies.

If you make taxable supplies, you are entitled to register for VAT and reclaim the VAT that you are charged on your purchases. Unless you satisfy certain conditions, you are not allowed to reclaim the VAT you are charged on the purchases you use to make exempt supplies.

You may be eligible for simplification schemes, such as cash accounting, annual accounting and the flat rate scheme. Please speak to us if you need VAT advice; we can help you determine the correct VAT treatment of your supplies and make the VAT compliance process easier for you to manage.

Corporation Tax

Limited companies pay corporation tax on their taxable profits. In arriving at the taxable profits figure, directors’ salaries and employer’s secondary Class 1 National Insurance Contributions (NICs) are deducted. Dividends are, however, not deducted. Corporation tax is calculated for financial years as follows:

Companies with profits between the lower and upper thresholds pay tax at 19% on profits up to the lower threshold and at 26.5% on profits between the lower and upper threshold. This differs from the approach for companies with profits above the upper threshold, as they must pay tax at 25% on all profits arising.

The thresholds must be equally shared between companies in a group and those owned by the same person or persons.

Loans to shareholders and employees

If a limited company has loaned money to certain shareholders, a corporation tax charge will be levied at 33.75% on any amounts outstanding nine months and one day after the end of the accounting period in which the loan was made. The charge is refunded to the company after the shareholder has repaid the loan.

In addition, low-interest loans made to employees may give rise to a taxable benefit (see above). This only applies if the loan exceeds £10,000 during the tax year.

Research and Development tax relief

Enhanced Research & Development (R&D) tax reliefs may be available to companies that work on innovative projects in science and technology. The rules surrounding R&D tax relief have recently changed, so please talk to us if you are considering making a claim. 

Business Tax Reliefs

For limited companies and unincorporated businesses, the following are often viable tax deductions from trade profits.

Capital allowances

Limited companies and unincorporated businesses can claim capital allowances when they buy qualifying capital assets for use in their trade. 

Capital allowances vary from 3% to 100%. For plant and machinery, qualifying expenditure is, depending on its nature, held in either a ‘main’ or a ‘special rate’ pool, with annual writing down allowances given as a deduction from profits.

* The AIA can be used for most equipment purchased by a business, including vans and commercial vehicles but not cars. In situations where there is a corporate group and/or a person owns multiple businesses, the AIA may need to be shared between those businesses. Further, some businesses, including partnerships with a corporate partner, are not entitled to the AIA at all.

Tip: ** 100% FYAs are available for brand-new electric cars and electric vehicle charging points, as well as some other less common asset types.

Capital allowances can be claimed on cars that are not new or electric, but at the main or special writing down allowance rates, depending on whether the car has carbon dioxide emissions of up to or more than 50g/km respectively. 

*** For limited companies and a small number of other business structures, a practice of ‘full expensing’ is permitted. This is effectively an unlimited 100% FYA on almost any brand-new plant and machinery acquired (again, excluding cars), although a lower 50% FYA is in operation for ‘special rate’ items (broadly fixtures and systems that are an integral part of a building). Full expensing is useful for companies that have no available AIA.

The structures and buildings allowance is only applicable for costs on construction contracts signed on or after 29 October 2018 and is more suitable for some businesses than others.

If you are planning to buy or sell capital assets, please talk to us, as the nature and timing of the transaction could affect how much tax relief you can claim and when.

Expenses incurred ‘wholly and exclusively’ for the purposes of the trade

There are a range of expenditure items on which you can claim 100% tax relief with the broad test being whether the expense was incurred ‘wholly and exclusively’ for trading purposes. This includes stock purchases, business travel, office expenses, certain clothing, professional fees, finance costs, training courses and more.

The rules vary depending on circumstances so please talk to us to identify all available reliefs for your business.

 If are final article about tax rates, we will take a closer look at CGT, Inheritance Tax and tax rates in respect of buying a property. However, if you would like to discuss any of the issues raised in this, or other articles in this series, please get in touch. 

This summary only an overview of several key UK taxation rates, allowances and reliefs as applicable to persons resident and permanently settled in the UK. No action should be taken without consulting the detailed legislation or seeking professional advice.  Therefore, no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this summary can be accepted by the authors or the firm.