Businesses in general pay PAYE in respect of their employees, and VAT on turnover if they are required to be registered for that tax. Unincorporated businesses (sole traders and partnerships) pay income tax and NIC on their profits; companies pay corporation tax on all their profits including capital gains.
Neither capital expenditure nor depreciation is generally allowed as an expense. Instead, many classes of capital expenditure receive a capital allowance, which may spread the cost over several years, and which is not related to the accounting depreciation.
The major categories of capital allowance in 2010/11 are:
Different rules for corporation tax
Certain categories of capital expenditure by companies are treated differently. New expenditure on ‘intangible assets’, including goodwill, know-how and patent rights, is in general relieved for tax according to the accounting treatment (i.e. depreciation).
There are increased allowances for companies which clean up contaminated land or carry out R&D work – the expenditure is uplifted for tax purposes, effectively creating a grant for doing the work. The uplift is 50% for land remediation, 75% for small/medium company R&D, and 30% for large company R&D.