Maximising Small Business Deductions: A UK Perspective

As a business owner, it is incredibly important to understand what allowable expenses you can claim to reduce your Corporation Tax bill. The new financial year is just around the corner, so let’s have a look at some of the ways that you can maximise tax deductions to keep your business’ taxable profits low.

What Is The Corporation Tax Rate?

From 6th April 2023, corporation tax increased from 19 to 25% for businesses that make profits greater than 250,000. Businesses operating at profits less than £50,000 will continue to pay the 19% tax rate. It is worth noting that companies with a March 2024 year-end onwards will be faced with the full 25% tax rate, subject to the above thresholds. Businesses that are in between the two thresholds can claim Marginal Relief on the main corporation tax rate (25%) – this is calculated by HMRC.

Capital Allowances

Capital allowances are a type of business tax relief that enables businesses to deduct either total or partial costs of certain items from the overall profit, before paying tax. These allowances include:

1. Full expensing (we will go into detail in the next section)
2. 50% First-Year Allowance (this is extended until 31st March 2026)
3. Annual Investment Allowance (this is now permanent as of 31st March 2023)

Full Expensing Deduction

Full Expensing is basically the replacement for the current super-deduction tax relief scheme. This means that businesses are now able to claim a 100% deduction from profit (before tax) on certain plant and machinery investments, including:

• Office equipment (including desks & chairs)
• Machines (including computers, printers, planers etc.)
• Vehicles (excluding cars, but including vans, lorries, and tractors)
• Warehouse equipment (e.g. forklifts, pallet trucks, shelving)
• Tools (e.g. ladders, drills, chainsaws)
• Construction equipment (e.g. bulldozers, excavation equipment).

R&D Tax Relief

Research & Development (R&D) is encouraged within businesses, so there is the opportunity to claim tax relief on investments that your business makes on innovating and developing new products, services, and even processes.

For loss-making SMEs that are R&D intensive, the tax relief sits at 27%, and for companies spending over 40% of their total expenditure on R&D they can claim 14.5% back.

Tax Deductible Expenses

It is also important to include tax deductible expenses within your financial records. These are costs that businesses can deduct from their gross income before tax, thus reducing the amount of corporation tax that is owed. Both sole traders and limited companies can claim tax relief for expenses that are exclusively purchased for trade. However, if a limited company director incurs private expenses through the company, these have to be treated as earnings instead.

Here are some examples of small business tax deductions:

• Business travel expenses (vehicles, fares, overnight accommodation)
• Uniform costs (must have the company name & logo visible)
• Office, property, and equipment costs (rental deposits are excluded)

Employee-Related Expenses

HMRC recognises that employees are integral to the running of businesses, so they do allow some employee expenses too, including:

1. Salaries, bonuses, pensions and benefits
2. Agency fees and subcontractor payments
3. Employee National Insurance contributions

Some events can also qualify for an employee tax deduction, particularly if you are providing business entertainment (such as a work Christmas party). The criteria for this is that the event has to occur annually, all employees must be invited, and costs are under £150 per person.

You can also claim for sending your employees on training courses to improve their skills and knowledge, as long as the course does not cover topics that will help you start a new business or expand into different markets.

Claiming Small Business Tax Deductions

The HMRC website provides an extensive list of allowable tax deductions for small businesses, which apply to both sole traders and limited companies. The easiest way of claiming tax deductions is by subtracting allowable expenses from your gross profits, to calculate your taxable profits. Most expenses can be offset against your business’ corporation tax liability.

Keeping up-to-date financial records is essential when it comes to maximising small business deductions, particularly as HMRC can investigate your records for at least 6 years following filed tax returns. So don’t throw away any receipts, invoices or paperwork related to each claim. One way to reduce the risk of your business being audited is to avoid common mistakes:

1. Excessive or Unsubstantiated Deductions: Claiming deductions that are disproportionately high compared to your income or that you can’t substantiate with proper documentation can raise red flags with HMRC. Make sure you have supporting documents for all your deductions.
2. Ignoring Changes in Tax Laws: Tax laws change frequently, so what was deductible last year may not be deductible this year. Stay informed about changes in tax laws that may affect your deductions to avoid claiming outdated or disallowed expenses.
3. Mixing Personal and Business Expenses: If you’re a business owner, it’s crucial to keep your personal and business expenses separate. Claiming personal expenses as business deductions or vice-versa can trigger an audit and result in penalties.
4. Failing to Report All Income: Failing to report certain sources of income can result in penalties and interest charges. Ensure that you report all sources of income, including wages, self-employment income, interest, dividends, and any other taxable income.
5. Not Seeking Professional Advice: Tax laws can be complex, and it’s easy to make mistakes if you’re not familiar with them. If you have questions or concerns about claiming deductions, consider consulting a tax professional to ensure you’re complying with all relevant regulations and maximising your tax savings within the bounds of the law.

If you are struggling with your tax return and would like some qualified advice on reducing tax liabilities for your business, get in touch with the experts at Wright Vigar.