The UK is a great place to set up your SME. With one of the lowest corporate tax rates in the world, you’re already off to a good start. You can also take advantage of many small business tax reliefs. Here’s how.
Corporation Tax in the UK is currently set at 19%. If you’re a limited company or a foreign company with a UK operation, you’ll pay this tax on your profits. Businesses in the UK can benefit from tax reliefs to reduce the amount of Corporation Tax they pay. Reliefs are deducted as costs of running the business before you’re taxed on your profits. Here’s our guide to the types of tax relief you can qualify for:
If you buy assets to use in the operation of your business, you can claim capital allowances on their costs. These assets include things like equipment, machines and vehicles such as cars or vans. You can deduct their value from your profits to reduce the tax you’ll pay. There are several other capital allowances, including patents, intellectual property and renovating business premises in disadvantaged areas.
You must buy and own the assets used in your business for it to be a capital allowance. You can’t simply lease them.
Annual investment allowance (AIA)
If you’ve bought plant and machinery that qualifies for AIA during a 12-month period, you can deduct the full value of it from your profit before tax. There are some assets that don’t qualify for AIA, including cars and items you had before you started using them in the business.
The AIA threshold was set at £200,000 but has been temporarily increased to £1 million from 1 January 2019 to 31 December 2020.
Writing down allowances
If you’ve already claimed AIA up to the £200,000 threshold, you can instead deduct a percentage of the value as writing down allowances. This can also be used if the item won’t qualify for AIA (cars, gifts or items you owned before using them in the business).
First year allowances
If you’re just starting your business, you can qualify for first year allowances on newly purchased equipment. These allowances don’t count towards your AIA threshold. This is known as an enhanced capital allowance (ECA) and can be used for water and energy efficient equipment.
Research and Development tax relief
Research and Development (R&D) tax relief is either an amount paid by HMRC or a reduction in a company’s tax bill. It’s based on company expenses on R&D projects that focus on advances in science or technology. It lets small businesses deduct the cost of their R&D projects as well as up to 130% extra, for a total deduction of 230%.
To qualify as an SME, you need less than 500 staff and a turnover of under €100 million or a balance sheet total under €86 million.
What can you claim?
You’re allowed to claim during the life of the project for the costs you incur, such as:
- Staff salaries, insurance and pension fund contributions
- Subcontractor costs, if you use one for your R&D
- Software licence costs if used in connection with your R&D
- Consumable items such as materials and utilities
- Clinical test volunteer compensations
What can’t you claim?
You’re unable to claim for certain expenses like:
- Production and distribution costs of services and goods
- Capital expenditure
- Land costs, rental costs and rates
- Patent and trademark fees
What projects qualify?
Your project needs to work towards making technological or scientific advances and be related to what your company does. There are four criteria you need to satisfy:
- Your project must aim to advance your field. It can’t just be for your business, and it needs to be a new development.
- The project must be concerned with the unknown. It can’t be something that’s already been researched.
- You need to show how your R&D worked to advance your field, including any successes and failures during the project.
- You must prove that a professional couldn’t easily do what you’ve worked on.
Business rates relief
If you use a building for your business, you’ll pay business rates on that property. There are certain rates reliefs relevant to small businesses, such as:
Small business rate relief
Your property needs to have a rateable value less than £15,000 and your business must only use that one property. If your property has a rateable value of £12,000 or less, you won’t pay business rates. For properties between £12,001 and £15,000, the relief decreases gradually from 100% to 0%. There are other reliefs if you have more than one building.
If your business operates within an enterprise zone, you can qualify for some business rates relief. The amount of relief depends on the local council of the enterprise zone.
There are some other business rates reliefs, such as a rural rate relief, charitable rate relief, exempted and empty buildings rate relief, hardship relief and transitional relief. If your business is a shop, restaurant, café, bar or pub in the UK and has a rateable value of less than £51,000, there's also a retail discount relief.
Start-up tax relief schemes
Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS) and Social Investment Tax Relief (SITR) are for investors looking to back start-ups and small businesses. They can receive tax reliefs based on their investments.
Small businesses may not directly get tax reliefs through these schemes, but they can benefit from investors looking to support them. If you’re a start-up, it’s worthwhile making yourself attractive to potential investors through compliance with the schemes’ requirements.
What’s the difference?
The SEIS is for companies in very early stages. Your company can receive up to £150,000 through this scheme and investors can get income tax relief of 50% against their investments.
For established small and medium-sized businesses, there’s the EIS. It offers investors 30% income tax relief, but companies can receive up to £12 million.
SITR is for companies with community interests and benefits or charities. Investors can claim 30% income tax relief on up to a £1 million investment which must be invested for a minimum of 3 years.
Each scheme has different requirements for both investors and the businesses they invest in. Speak to an expert SME accounting consultant if you’re unsure your company qualifies.
The Patent Box
If your business has patented inventions and makes a profit off those patents, you can potentially reduce your Corporation Tax to 10%. The relevant income must come from specific categories, including selling patented products, licensing or selling patent rights, patent infringement income, damages or compensation from patent rights or a patented manufacturing procedure or tool.
Creative industry tax reliefs
Companies involved in the creative industry can also qualify for tax reliefs. This incentive is to promote relevant cultural productions in the UK and incentivise investment.
To qualify for a creative industry tax relief, your business needs to pass a cultural test. The test is conducted by the British Film Institute (BFI) and applies to films, programmes or video games. To pass, the production needs to be certified British.
Here’s the list of creative tax reliefs:
- Film Tax Relief (FTR)
- Animation Tax Relief (ATR)
- High-end Television Tax Relief (HTR)
- Children’s Television Tax Relief (CTR)
- Video Games Tax Relief (VGTR)
- Theatre Tax Relief (TTR)
- Orchestra Tax Relief (OTR)
- Museums and Galleries Exhibition Tax Relief (MGETR)
If your small business pays Class 1 National Insurance for your employees, you can claim to reduce this bill by up to £3,000 a year. You can’t claim if you’re the only employee in your business, or your employee does personal or domestic work (unless they’re a carer).
Tax deductible expenses
In addition to the numerous tax reliefs available for SMEs, there are also business expense claims. This covers a broad range of categories:
- Office and property – stationery, rent, insurance and repairs
- Vehicle and travel – fuel, repairs, insurance, tickets, hotels and parking
- Clothing – uniforms, protective gear and costumes
- Staff – salaries, bonuses, pensions and benefits
- Reselling – stock for resale, raw materials and production costs
- Legal and financial – accountant and lawyer fees, bank charges and insurance policies (PI and PL)
- Marketing – advertising, samples, website costs and professional subscriptions
If you want to claim one of these tax reliefs, get in touch with us today. We provide outsourced accounting services for both SMEs and contractors. We can even assist with any personal tax queries, submitting your tax returns and claiming your tax refund.
We offer small and medium-sized enterprises end-to-end accounting solutions. To discuss a personalised solution for your business, contact us at firstname.lastname@example.org or call +44 (0) 20 7759 7553
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