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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.
Capital allowances
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 2014/15 are:
| Plant and machinery |
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| • approved energy saving plant |
100% |
| • low emission cars (rating up to 95g/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% |
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** 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. |
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The AIA (Annual Investment Allowance) was £250,000 up to 31 March 2014 (companies) or 5 April 2014 (income tax) and is scheduled to revert to £25,000 on 1 January 2016. A complex calculation is needed where a period of account straddles the change of the AIA limit. |
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Cash accounting
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 (£162,000 for 2014/15).
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.
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