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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.
Capital allowances
Capital expenditure is not 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 are:
| Plant and machinery |
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| • general: writing down allowance on residue of expenditure |
25% |
| • small businesses: first year allowance* |
50% |
| • medium businesses: first year allowance |
40% |
| • all businesses: approved energy saving plant |
100% |
Cars |
| • general: writing down allowance (max £3,000pa) |
25% |
| • low emission cars (rating up to 120g/km) |
100% |
Long life plant: writing down allowance |
6% |
| Research and development: capital equipment |
100% |
Buildings (excluding land value) |
| • industrial buildings: straight line allowance |
4% |
| • agrigultural buildings |
4% |
| • qualifying hotels |
4% |
| • enterprise zone commercial buildings |
100% |
| • enterprise zone buildings if 100% not claimed in first year |
25% |
| • converting vacant space over commercial premises into flats |
100% |
Know-how and patent rights (not corporation tax) |
25% |
* 40% before 1/4/06 (companies) or 6/4/06 (other).
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 (ie 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 and for small/medium company R&D, and 25% for large company R&D.
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