Tax Reliefs and Incentives for Companies: Maximising Business Savings

The number of companies registered in the UK has been increasing in recent years. This popularity is due to several reasons, including the lower corporation tax rates and higher flexibility in expense deductions, limited liability, etc. Property investors and landlords are increasingly using companies to hold their portfolios due to benefits such as unrestricted mortgage interest relief, reduced corporation tax, and access to capital allowances.

However, many individuals are still not aware of the tax reliefs and incentives for companies. As a result of this lack of knowledge, they end up paying too much tax. It is, therefore, crucial for individuals to be aware of all the reliefs available to them. In this article, we will explore the reliefs and incentives that are generally overlooked.

Deductible Expenses

Companies pay tax on their taxable total profits, which is the net profit after the deduction of the income. As a process of arriving at the taxable total profits, companies can deduct expenses incurred ‘wholly and exclusively’ for the purposes of business. Deductible expenses include salaries and wages paid to the employee, repair and maintenance, benefits given to employees, etc.

Expenses that are incurred in the process of setting up a new business before the company formation are also deductible expenses and can be claimed as expenses in the company’s first tax return.

Mortgage Interest

Companies are not subject to the Section 24 restrictions, allowing them to deduct the entire amount of mortgage interest paid as an allowable deduction. This is particularly advantageous for companies, especially when dealing with substantial mortgage interest payments.

Qualifying Charitable Donations

When companies make qualifying charitable donations, these are deducted from their total profits, reducing their total taxable profits. Charitable donations refer to qualifying cash donations to charity and qualifying disposals of investments land to charity. Similarly, donations to local charities are also fully deductible.

Capital Allowance

Capital allowance is one of the most important tax mechanisms for companies. Companies can claim capital allowance on the purchase of equipment, plant, and machinery for their business. Companies engaged in residential property letting will not be able to claim capital allowance on their expenditure. However, FHLs and commercial properties are still eligible to make the claim.

Capital allowances such as the Annual Investment Allowance (AIA) and the First Year Allowance (FYA) are huge tax reducers for companies, giving them a huge relief from corporation tax.

Capital Apart from the AIA, companies can write down the value of the plant and machinery by 18% or 6%, depending on the nature of the plant and machinery. Plant and machinery under the main pool get an 18% reduction, whereas, for the special rate pool, it is 6%.

Tax Reliefs

Research & Development Tax Relief

Research & Development tax relief provides support to companies engaged in innovative projects within the fields of science and technology.

Under the Small and medium-sized enterprise R&D relief, companies can:

• deduct an extra 86% of their qualifying costs from their yearly profit, as well as the normal 100% deduction, to make a total of 186% deduction.
• claim a payable tax credit if the company has claimed relief and made a loss; the payable credit is worth up to 10% of the surrenderable loss.

However, it's important to note that you cannot claim this relief if the advancement is in the areas of arts, humanities, or social sciences, including economics.

Rollover Relief

When companies choose to replace qualifying assets, they can defer the chargeable gain resulting from the disposal through a mechanism known as rollover relief. With this relief, the chargeable gain arising from the sale of the replaced asset is subtracted from the cost of the new replacement asset, giving companies instant relief.

For the relief claim to be successful, the following criteria must be met:

• The new assets must be purchased within 3 years of selling or disposing of the old ones (or up to one year before)
• The company must be trading when the old assets are sold, and the new ones purchased
• Both old and new assets must be used for business purposes.

Companies can also claim:

• provisional relief if they’re planning to buy new assets with the proceeds but have not done so yet
• relief if the proceeds is used to improve the assets they already own

Land Remediation Relief

Land Remediation Tax Relief is a tax incentive scheme implemented by the UK government to promote the clean-up and redevelopment of contaminated or derelict land. It applies specifically to corporation tax, offering an attractive tax relief that gives a tax deduction of up to 1.5 times the money spent on cleaning up the contaminated site and building if the expenditure is qualifying.

Qualifying expenditure includes the cost of establishing the level of contamination, removing the contamination or containing it so that the possibility of relevant harm is removed. There is, however, no relief if the remediation work is not carried out.

Conclusion

Maximising available tax reliefs and incentives is crucial for companies looking to improve their financial position while remaining competitive. By leveraging mechanisms like capital allowances, R&D tax relief, and group relief, businesses can reduce their tax burden, reinvest savings, and promote innovation. Each relief offers distinct advantages, whether through lowering taxable income, deferring chargeable gains, or fostering technological advancements.

Companies should carefully assess which reliefs they qualify for and ensure proper application to benefit from these opportunities fully. Understanding these tax mechanisms will allow businesses to strategically manage their tax obligations and invest in their future growth.