An Introduction to Tax and National Insurance for Business

From sole traders to large companies, get the lowdown on your obligations here

An Introduction to Tax and National Insurance for Business

Which expenses are allowable?

You can write off some business expenses against your income, reducing the total amount of tax you have to pay. Broadly, the rule is that business costs are allowable, but personal costs are not. So, for example, you could claim back the cost of a dedicated business telephone line, but your weekly shop Allowable expenses can include:

  • Goods your business buys in. This includes raw materials, stock, and anything your business resells. Make sure you value your stock at cost price for tax purposes – if you value it at sale price, this will increase your profit figure (and hence, the tax you have to pay).
  • Rents and utilities. Costs associated with business premises are generally allowable. This applies even if you work from home – you can claim the cost of utilities you use for purely business purposes, such as business telephone calls and the cost of lighting and heating your home office. You may be able to claim a proportionate amount of your rent or mortgage if you have a part of the house specifically set aside for business use – find out more information here.
  • Staff wages and benefits. See more on this later in the article.
  • Research and development (R&D) tax credits. This is a kind of corporation tax relief that incentivises you to reduce your tax bill through R&D spending. If you are a small or medium-sized business (annual turnover not exceeding €100m or a balance sheet of €86m or less, and less than 500 employees) this is set at 225% of spending. In other words, if you spend £100 on R&D, you can claim £225 back.
  • Sales and finance costs. This might include the cost of an advertising or marketing campaign, and interest rates on commercial loans.
  • General running costs. This might include business travel, mobile phone contracts, hotels on business trips, insurance, and so on.
  • VAT. If you are not registered for VAT, you pay it as part of your expenses.
  • Bad debts. You can set off invoices that obviously aren’t going to be paid.
  • Client entertainment. Tread carefully when it comes to this – as lawyer Martin Cunningham explains in this article, “one man’s lunch at the Ritz Grill is another’s Big Mac”. “Within reason, courts will usually conclude that you have not acted dishonestly when you expend the company’s money extravagantly in pursuit of a recognised business objective,” Cunningham explains. “Striving to win an important order or clinch a deal would merit the expense. Throwing a party for your wife and her friends, conversely, is unlikely to be seen as having a readily discernible business objective.”

What are capital allowances?

When you spend money on assets and equipment for your business, you cannot claim the entire value of whatever you just bought as an allowable expense. Instead, you might be able to claim a capital allowance of that expenditure – this is an portion you can write off each year as an expense to account for the depreciation in value of that asset. Key features of capital allowances include:

  • You write off a percentage of the value of the asset. Essentially, capital allowances work by writing down the value of an asset by a certain percentage each year and claiming the value of that percentage as expenses. The rate of capital allowance depends on what kind of asset you are purchasing and who you are – we cover this in more detail later.
  • The Annual Investment Allowance (AIA). This scheme gives you 100% capital allowance on the first £250,000 of expenditure on assets – excluding cars. It will be increased to £500,000 in 2015.
  • Some capital expenditures can be written off completely. Certain plant and machinery has a 100% first-year capital allowance – meaning you can claim back the entire purchase price as an allowable business expense. These are:
    • New energy-efficient cars (CO2 emissions of less than 96g/km)
    • Certain energy-efficient equipment
    • Environmentally beneficial water efficient equipment
    • Refuelling equipment for natural gas, biogas, or hydrogen-powered vehicles
    • Electric vans and other zero-emission goods vehicles
  • The main rate pool. Instead of claiming capital allowance per item, many businesses prefer to simplify matters by ‘pooling’ their equipment (excluding cars), with capital allowance calculated at 18% of the total value of all the goods.
  • The special rate pool. This is like the main rate pool, except capital allowances are calculated at 8%. Special rate items include:
    • Certain cars with CO2 emissions of more than 130g/km
    • Plant and machinery that counts as thermal insulation or an integral building feature
    • Assets with an expected useful life of over 25 years (long-life assets)
    • Cushion gas
  • Short-life assets. If you have an asset with an expected useful life of just a few years, you can claim it as a short-life asset, or SLA, which speeds up capital allowance relief. You can claim anything as a short-life asset, subject to a number of important exceptions, which you can read about here.
  • Deferment. You can defer claiming capital allowances until the next year, if you wish – this means the value of your assets will not change for tax purposes in the present year.
  • VAT. If your business is not registered for VAT, the equipment you buy will also be eligible for capital allowances.

Can I offset trading losses against my tax obligations?

  • If you are self-employed: If your self-employed venture has made a loss, you can offset the cost of this loss against any other taxable income received in that tax year or the one before, such as income from a second job or capital gains from shares. You can also carry these losses forward to offset profits in the future made from the same venture.
  • If you own a limited company: Companies can similarly offset their losses against other income. You can carry back these losses for one year and claim back previously paid tax as well.
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