Businesses in general pay PAYE in respect of their employees, 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.
Neithercapital 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 2012/13 are:
|Plant and machinery|
|• approved energy saving plant||100%|
|• low emission cars (rating up to 110g/km)||100%|
|• first £25,000 expenditure per year||100%|
|• writing down allowance on general pool||18%|
|• writing down allowance on special rate pool**||8%|
|Research and development: capital equipment||100%|
|Buildings (excluding land value)|
|• converting vacant space over commercial premises into flats||100%|
|Know-how and patent rights (not corporation tax)||25%|
** The special rate pool contains cars with CO2 ratings above 160g/km, long life assets, plant integral to buildings and thermal insulation. The general pool contains other plant including lower emission cars.
WDAs were 20%/10%, and 100% of the first £100,000 of expenditure was allowed, before April 2012. A composite calculation must be carried out where a period of account straddles the change of rate.
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 or amortisation).
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, 125% for small/medium company R&D, and 30% for large company R&D.