Chris Downing, Director of Inspire, the business and tax advisers, answers your questions

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Knowing what your company can (and can’t) deduct from its profits for Corporation Tax purposes can fundamentally reduce the amount of tax that you pay – and we all want to pay as little tax as possible, right?

There are certain items of expenditure that can be deducted when calculating taxable profit – here are some examples…

Capital Allowances

Generally speaking, depreciation (mentioned below) is not an allowable expense for tax purposes.  Instead, Capital Allowances are deducted from profit to replace the depreciation in the accounts.  There’s currently a temporary Annual Investment Allowance (100% deduction on qualifying expenditure) limit of £1,000,000.  From 1 January 2022, this annual limit will reduce to £200,000.  If your year end crosses this date, the timing of when you buy equipment matters! The idea of the Annual Investment Allowance is to encourage investment in qualifying business assets such as plant, machinery and office furniture

The super-deduction was introduced on 1 April 2021 and will run until 31 March 2023 – the new rules benefit companies investing in qualifying new plant and machinery. This is an extra 30% deduction (over and above the Annual Investment Allowance), but the asset must be new, not second hand.

Currently companies can receive first year allowances (100% deduction) on brand new cars purchased with zero emissions, i.e. a fully electric car.

Research and development

For SME’s, where R&D takes place, there is an additional 130% relief that can be claimed on certain costs when computing the company’s taxable profits. This is designed to encourage innovation within the UK.

As an example, say £50,000 of costs during the year directly relate to R&D activities. Additional tax relief of 130% could be claimed (so a total of 230%) on those costs.  With the Corporation Tax rate being 19%, this brings an additional tax saving of £12,350, an effective tax saving of 24.7%.

Staff entertaining

Staff entertaining is an allowable cost for tax purposes, provided there is no element which relates to client entertainment.  There may, however, be personal tax implications on the employees if the entertaining exceeds £150 (per person, per year) or is not open to all staff members.  For example, a Christmas party held for staff would qualify.

Accrued wages

Wages that are accrued in the accounts (such as a bonus) are allowed a tax deduction so long as the amount is actually paid within nine months of the year-end.

Repairs

Expenditure on repairs can be deducted from a company’s tax liability provided there is no major enhancement to the item being repaired.  For example, restoring a broken machine or redecorating the office.

Bad debts

If you write off a customer debt which is no longer recoverable a deduction is allowed for tax.  This is only for specific customer debts, not an allowance of say 1% of the sales ledger balances.

The following expenses are NOT allowed as a Corporation Tax deduction:

Depreciation

Depreciation is not allowed (as this area of accounts is subject to judgement), Capital Allowances are allowed as a tax deduction instead.

Legal fees

If you incur expenditure on legal fees relating to capital expenditure, for example on the purchase of an investment property or on advice regarding shares, this expense is disallowed for tax purposes.

Clothing

Expenditure on clothing is disallowed, unless it is uniform which bears the company logo or is protective clothing.

Client entertaining

Expenditure incurred on customer or supplier entertaining is not allowed for tax purposes.  For example, taking your customer out for a meal.

Business gifts

Business gifts are not allowed for tax purposes unless it costs less than £50, it is neither food nor drink and it bears the business name.  For example, stationary bearing the company logo.

Car lease costs

If the car the company is leasing has emissions which are more than 50g/km (for leases entered into after 1 April 2021) then 15% of the lease cost in the profit and loss account is disallowed for tax.

Fines / penalties

Any fines or penalties that the company pays will not receive a tax deduction.  For example, a speeding fine.

Accrued pension contributions

Any pension contributions which the company pays during the accounting period is allowable, however if you decide to accrue for any pension contributions that the company pays for after the accounting period has ended, this is disallowed for tax purposes.  For example, a company with a December 2020 year-end has accrued for £5,000 of pension contributions for one of its Directors.  The company pays the £5,000 in March 2021 following the year-end.  Although the £5,000 would be included as an expense in the 2020 accounts, it would only receive tax relief in the 2021 accounts.

Dividends

Although salary costs are deductible for tax purposes, dividends are not.

If you’d like more details or advice on business tax, please contact us or call 01202 717867 and our friendly tax team will be happy to help you.