Businesses in general pay PAYE in respect of their employees’ salaries, and VAT on turnover if they are required or choose to be registered for that tax. Unincorporated businesses (sole traders and partnerships) and LLPs 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 qualify for 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 allowancein 2013/14 are:
|Plant and machinery|
|• approved energy saving plant||100%|
|• low emission cars (rating up to 95g/km)||100%|
|• first £250,000 expenditure per year (AIA)||100%|
|• writing down allowance on general pool||18%|
|• writing down allowance on special rate pool**||8%|
|• research and development: capital equipment||100%|
|• know-how and patent rights (not corporation tax)||25%|
* 110g/km for expenditure before April 2013.
** The special rate pool contains cars with CO2 ratings above 130g/km (160g/km for expenditure before April 2013) long life assets, plant integral to buildings and thermal insulation. The general pool contains other plant including lower emission cars.
The AIA (Annual Investment Allowance) was £25,000 from April – December 2012. A composite calculation must be carried out where a period of account straddles the change of amount.
From April 2013, unincorporated businesses with turnover below the VAT registration threshold will be allowed to choose to calculate their taxable profits on a ‘cash basis’ – using the income received and expenditure paid, rather than amounts invoiced or accrued. Some business expenses will be allowed on a flat rate amount rather than being based on actual expenditure. Use of the cash basis will be compulsory for any trader claiming Universal Credit. A business will be entitled to continue to use the cash basis even if its turnover grows, until it reaches twice the VAT registration threshold (in 2013/14, £158,000).