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.
Sole traders, and partners in business partnerships, pay income tax and NIC on their share of the business profits. Companies pay Corporation Tax on all their profits (which include 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 allowance in 2015/16 are:
|Plant and machinery|
|• approved energy saving plant||100%|
|• low emission cars (rating up to 75g/km)||100%|
|• first £500,000 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%|
* The special rate pool contains cars with CO2 ratings above 130g/km, 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) is scheduled to reduce to £25,000 on 1 January 2016, but this is likely to be reviewed in late 2015. Transitional rules apply where a period of account straddles the change of the AIA limit.
Unincorporated businesses with turnover below the VAT registration threshold can choose to calculate taxable profits on a ‘cash basis’ – income received and expenditure paid, rather than invoiced or accrued. Use of the cash basis can continue even if turnover grows, until it reaches twice the VAT registration threshold (£164,000 for 2015/16).
Flat rate expenses
Unincorporated businesses can also choose to use ‘flat rate deductions’ for motoring expenses and the cost of working from home, instead of calculating the business proportion of actual expenditure. These two options may simplify calculations but will also change the amount of tax payable.