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Top 10 Tax Breaks for Small Businesses

November 16, 2022
With sky-high inflation rates driving prices up across the nation, the UK population is feeling the pinch — and small business owners are no exception.While you may (understandably) be worried about how these economic shockwaves could impact your business, there are a handful of small business tax reliefs available to small business owners and startups to help you cut down on your tax bill and get you more bang for your buck.In this article, we’ll be covering the different small business tax reliefs available in the UK, who can apply, the application criteria requirements and how you can make a successful claim.

What is a tax relief?

Before we dive into the small business tax reliefs UK business owners can claim, we’ll first unpack what a tax relief is and how tax relief works.A tax relief — otherwise known as a tax break or tax refund — is a way for businesses to save money on tax, either by accounting for any tax deductible business expenses and investments, or by having tax repaid in an alternative way, such as into a personal pension.It’s also worth stating what a tax break isn’t. Taking advantage of a tax break isn’t the same as dodging or avoiding tax, either by exploiting a loophole in the tax system or by paying less tax than you owe.Rather, business tax reliefs are actively encouraged by the UK government, as many of the tax breaks offered are positioned to encourage business investment and, subsequently, boost the economy. Certain tax breaks also reward positive contributions to wider society, with business tax deductions on charity donations and research and development spending up for grabs.There are, however, a few conditions that need to be met before you can apply these government tax reliefs to your own tax bill. Some tax reliefs are specific to certain business structures and industries, whereas others have a stringent set of criteria based on your taxable turnover and the exact business purchases you’ve made.With this in mind, we’ll outline 10 small business tax deductions available to UK business owners, the criteria they need to meet and how to claim them.

Ember’s Top 10 Small Business Tax Breaks

Small business rate relief

If you occupy a premises to run your business, you’ll likely be charged a business rate — a tax on a property used for non-domestic purposes only. While some non-domestic premises, such as farm buildings or places used for the welfare of disabled people are exempt, business rates are charged on the following properties:
    ShopsOfficesPubsWarehousesFactoriesHoliday rental homes or guess houses
The good news for small businesses is that you can apply to your local council for small business rate relief. Depending on your property’s rateable value, you could be entitled to a discount on your business rates — or have your business rate charges dropped altogether.You can apply for small business rate relief if:
    Your property’s rateable value is less than £150,000Your business only uses one property
If you use more than one property for your business, you may still be able to apply for small business rate relief if the following is applicable:
    None of your other properties have a rateable value above £2,899The total rateable value of all your properties is less than £20,000 (or £28,000 if you’re based in London)
If your property has a rateable value of less than £12,000, you’re in luck — you don’t have to pay business rates on properties with a rateable value below this threshold.However, if your property has a rateable value between £12,001 and £15,000, the rate relief you’re entitled to will gradually decrease the closer you get to the £15,000 mark. For instance, if your property has a rateable value of £13,500, you’ll be entitled to 50% off, whereas properties with a rateable value £14,000 will only get 33% off.While business owners with a rateable value above this threshold won’t be able to qualify for small business rate relief, there is still a chance they’ll be able to lower their business rates bill.Properties in England with a rateable value below £51,000 can have their business rate calculated using a small business multiplier — currently 49.9p — instead of the standard 51.2p multiplier. These rates are different for the City of London, so keep location in mind when working out how much of a discount you could be entitled to.

National Insurance tax relief (Employment Allowance)

If you’re a business owner who employs staff, you may be entitled to claim National Insurance relief, otherwise known as Employment Allowance.
As the name suggests, this relief is applicable to your National Insurance (NI) bill, and can see you save up to £5,000 in tax.

The way this relief works can be thought of as a credits system. Every time you run payroll, a chunk of your allocated Employment Allowance goes towards your Class 1 National Insurance Contributions (NICs) until either the £5,000 is gone or the tax year ends — whichever happens first.

You can claim Employment Allowance if you’re a business or charity with less than £100,000 in Class 1 NI liabilities from the previous tax year, or if you employ a care or support worker.
If eligible, your Employment Allowance will be automatically deducted by your payroll software — all you need to do is tick ‘Yes’ in the Employment Allowance field. For more on backdating claims from previous years, head over to GOV.UK.

Annual Investment Allowance (AIA)

If you’re planning on making hefty investments into your business, you might find in doing so you can reduce your tax bill substantially.
Applicable to ‘plant and machinery’ purchases, Annual Investment Allowance (AIA) is a type of capital allowance that allows you to deduct the full value of any qualifying items you buy to use and keep for your business from your profits before tax.

Until March 31st 2023, business owners can claim up to £1 million in AIA, meaning they can deduct up to this amount from their taxable profit and, as a result, reduce the tax they owe on their profits.To help kickstart the economy after the coronavirus pandemic, a super-deduction was announced in the Autumn Budget 2021, outlining a new 130% first-year capital allowance for qualifying plant and machinery assets. In short, this means that for every £1 invested into plant and machinery assets, companies can cut their tax bill but up for 25p.
You can find out more about the super-deduction at GOV.UK.

Before you start splashing out, keep in mind that plant and machinery items purchased must be for business use only.Plant and machinery items that can be claimed under AIA include the following:
    Items that you keep to use in your businessCosts of demolishing plant and machineryParts of a building considered integral, known as ‘integral features’Some fixtures, such as fitted kitchens, bathroom suites, fire alarms and CCTV systemsAlterations to a building to install other plant and machinery (not including repairs)
It’s worth noting that while cars are classified as plant and machinery, you cannot claim them under AIA — instead, you’ll need to claim them as a writing down allowance. This is also applicable to plant and machinery items you owned for another reason before you started using them in your business, or items given to you or your business.Equally, it’s important to know what isn’t classified as plant and machinery, and what you therefore cannot claim AIA on:
    Things you leaseItems used only for business entertainment — sadly, you can’t claim AIA on your company karaoke machineLandStructures, such as bridges, roads and docksBuildings, including doors, gates, shutters, mains water and gas systems
You can, however, claim structures and buildings allowance on structures and buildings.You can claim AIA on your business structure’s relevant tax return: Self Assessment for sole traders, partnership tax return for partners or Company Tax Return for limited companies.You’ll also need to make the claim in the accounting period you bought the item, which is either:
    When you signed the contract, if payment is due within less than 4 monthsWhen payment’s due, if it’s due more than 4 months later
Since the AIA amount has changed several times since 2008, you’ll need to check the AIA for the period you’re claiming for and adjust your claim accordingly.

Research and development tax relief

Got a groundbreaking idea that could innovate your industry? If so, you might be eligible to claim Research and Development (R&D) reliefs.This business tax relief aims to support companies working on innovative projects in the science and technology fields in pursuit of advancing their fields — even if their projects are unsuccessful.Keep in mind that R&D tax credits are strictly applicable to the science and technology fields only, and do not include social sciences or theoretical fields, such as economics or pure mathematics.Since this can be claimed on Corporation Tax, this business tax relief is only available for limited companies.To successfully make a claim, your project will need to tick the following boxes:
    Makes advances in your company’s field, not just for your business.Cannot be worked out by a professional in the field. You can demonstrate this by either evidencing other attempts to find a solution that has failed, or by bringing professionals in the field onto the project and getting them to explain the uncertainties involved.Demonstrate uncertainty. This happens when a subject expert cannot say if something is technologically possible, or otherwise isn’t sure how it can be done.Explain how you’ve tried to overcome uncertainty by showing that the R&D needed research, testing and analysis to develop it.
To claim Small and Medium Sized Enterprises (SME) R&D Relief, your small business will also need to have:
    Fewer than 500 staffA turnover of under 100 million euros or a balance sheet total under 86 million euros
To work out if you’re an SME, and therefore eligible, you’ll need to include any linked companies and partnerships when making your claim.If you meet all of the above criteria, you’ll be able to claim reduced tax payments on your project from start to finish, and for up to two years after the end of the relevant accounting period.With this tax relief, your small business will be able to:
    Deduct an extra 130% of their qualifying costs from their yearly profit, alongside the normal 100% deduction — adding up to a total 230% deductionClaim a tax credit if the company is making a loss of up to 14.5% of the surrenderable loss
You can also claim the following costs on your company’s R&D project:
    Employee costs, such as salaries, wages, Class 1 NICs and pension fund contributionsUp to 65% of relevant subcontractor costs for R&D activitiesSoftware and software licence feesConsumable items, such as materials and utilitiesClinical trial volunteers
However, you cannot claim for:
    The production and distribution of goods and servicesCapital expenditureLand costsPatent and trademark costsRent or rates
Ready to make your claim? Enter your enhanced expenditure into your full Company Tax Return form (CT600) and use the online service to support your claim.

Creative Industries Tax Relief

Unlike R&D credits — where the focus is on science and technology — Creative Industries Tax Reliefs were launched by the government in 2013 in a push to increase investment in the UK’s creative industries.Under this scheme, companies liable to Corporation Tax in the following industries can make a claim for Creative Industries Tax Relief:
    FilmHigh-end TVAnimationVideo gamesChildren’s TVTheatreOrchestraMuseums and Galleries Exhibition
Companies in these creative sectors must also have primary responsibility from start to finish. This can be from pre-production until film, programme or game completion, or in the cases of orchestral concerts and exhibitions, until the production closes.These companies must also be involved in decision-making, and must directly negotiate, contract and pay for rights, goods and services associated.If your company specialises in film, animation, television or video games, then your production will need to be certified as British. To be verified as such, they’ll need to pass a cultural test or qualify through an internationally agreed co-production treaty.If successful, the British Film Institute (BFI) will issue either an interim certificate for uncompleted work, or a final certificate where production has finished.
You can find more on the criteria for each sector-specific tax relief over at GOV.UK.

Allowable self-employed business expenses

Regardless of your business size or sector, if you incur costs running your business, you’ll be able to claim allowable expenses.

Allowable expenses are certain business outgoings that you can deduct from your total profit, as a result reducing your taxable profit — and subsequently, your tax bill.You can claim the following costs as allowable expenses:
    Office costs, including stationery and phone billsBusiness travel expenses, including parking fees or train fares for business tripsClothing expenses, such as uniforms and protective gearStaff costs, such as salaries and subcontractor costsThings you buy to sell on, for example stock or raw materialFinancial costs, such as bank charges and accounting costsCost of your business premises, including heating, lighting and business ratesAdvertising or marketing, such as website costsTraining courses and materials related to your business, such as subscription costsInsurance premiums, including health insurance
Allowable expenses don’t include money taken from your business to pay for a private purchases. For more on what exactly can be counted as an allowable expense, head over to our piece on expenses self-employed business owners can claim.

To claim, you’ll need to list each cost on your Self Assessment tax return. This in turn will be deducted from your taxable income, but you’ll need to keep records for each allowable expense for up to 6 years after you’ve claimed for it.

If you run a limited company, you’ll need to deduct business costs from your profits before tax, and must report any item you make personal use of as a company benefit.It’s worth noting that if you buy an item that you use for both personal and business use, you’ll only be able to claim for the business use. For example:Your mobile phone bills for the year total £200. Of this, you spend £130 on personal calls and £70 on business. You can claim for £70 of business expenses.This same principle can be applied if you work from home. You may be able to claim a proportion of your costs for things like heating, electricity and rent, but you’ll need to find a reasonable method of dividing up your costs. To use another example:You have 4 rooms in your home, one of which you use only as an office.Your electricity bill for the year is £400. Assuming all the rooms in your home use equal amounts of electricity, you can claim £100 as allowable expenses (£400 divided by 4).If you worked only one day a week from home, you could claim £14.29 as allowable expenses (£100 divided by 7).
Alternatively, you can use simplified expenses — a flat rate that can be used to work out your home office expenses — to make calculating your costs a lot easier.

Finally, keep in mind that you can only claim capital allowances if you haven’t used your £1000 tax-free trading allowance.

The Patent Box scheme

Designed to encourage companies to keep and commercialise intellectual property in the UK, the Patent Box allows companies to apply a lower rate of Corporation Tax — 10% instead of the current 19% — to profits earned on the inventions they’ve patented.You can use the Patent Box if your company:
    Is liable to Corporation TaxMakes a profit from exploiting patented inventionsOwns or has exclusively licenced-in the patentsHas undertaken qualifying development on the patents
Not only must your company be eligible for this scheme, but you’ll also need to make sure your patented invention is eligible too. For this to happen, your company must own or exclusive licence-in patents granted by:
    The UK Intellectual Property OfficeThe European Patent OfficeSpecific countries in the European Economic Area (EEA)
Your company must also have undertaken qualifying development for the patent, with “significant contribution” made to either:
    The creation or development of the patented inventionA product incorporating the patented invention
Finally, to claim the tax relief on your patent-related income, you’ll need to make sure it comes from:
    Selling patented items including products, products that incorporate the patented items and bespoke spare partsLicensing out patented rightsSelling patented rightsCompensation income or damaged from the infringements rights you own
If your business is eligible, you’ll need to make an election into the Patent Box within 2 years after the end of the relevant accounting period to get your Corporation Tax cut.
You’ll then need to calculate your qualifying profits and income. GOV.UK has provided an example of a Patent Box calculation on its website, but if you’re still struggling to work out what counts, you can book a 1-1 video call with an in-house qualified accountant at Ember.

Business Asset Disposal Relief (BADR)

Sometimes things just don’t work out — but you might still be able to get some money back.If you’re planning on selling your business at any point, you may be able to reduce your Capital Gains Tax bill by claiming Business Asset Disposal Relief (BADR).Formerly known as Entrepreneurs ‘ Relief before 6 April 2020, Business Asset Disposal Relief means you’ll be able to pay tax at 10% on all gains on qualifying assets.Whether you’re selling all or part of your business, you’ll need to have owned your business for a minimum of 2 years, and must be either a sole trader or business partner.
You can claim either on your Self Assessment tax return or by filling out the government’s Business Asset Disposal Relief help sheet.

Marginal Relief

This one’s for the limited companies. If you run your own limited company and your company’s profits before 1 April 2015 were between £300,000 and £1.5 million, you may be able to apply for Marginal Relief.This business tax relief works by giving you a gradual increase in your tax rate between the small profits rate and main rate — subsequently reducing your Corporation Tax.
You can work out how much of this tax relief you can claim by using HMRC’s Marginal Relief tool. This should only be used to calculate marginal relief on Corporation Tax profits up to 1 April 2015.

To claim, simply provide details in your online Company Tax Return and your filing software — such as Ember — should work it out for you.Alternatively, you can amend your Company Tax Return within 12 months of the filing date.

Seed Enterprise Investment Scheme (SEIS)

Unlike the business tax reliefs mentioned above, the Seed Enterprise Investment Scheme (SEIS) is a venture capital scheme that offers new company investors tax breaks when they buy new shares in companies on the scheme.To qualify, your company must be less than 2 years old, and at the time of investment have:
    No more than £200,000 in gross assetsLess than 25 employeesNot previously carried out a different trade
Your company must also:
    Have a permanent establishment in the UKCarry out qualifying tradePlan to spend the investment on qualifying tradeNot be listed on a recognised stock exchange at the time of investmentNot be controlled by another company
Most new companies should qualify, but there are some exceptions to the rule. Your business won’t be eligible to claim SEIS if more than 20% of your trade includes any of the following:
    Coal or steel productionFarming or market gardeningLeasing activitiesLegal or financial servicesProperty developmentRunning a hotelRunning a nursing homeEnergy generation, such as heat or electricityProduction of gas or other fuelsExporting electricityBanking, insurance, debt or financing services
You can find the full life of non-qualifying trades at GOV.UK.

To claim, you’ll need to follow these steps:
    Complete a compliance statement (SEIS1)Send HMRC the form with all the relevant accompanying documentationOnce successful, you’ll receive compliance certificate from HMRC, which you’ll need to issue to investorsFrom there, investors can claim tax relief on their investments in your company

Expert tips for claiming small business tax relief

Ember Co-Founder and Chartered Accountant Daniel Hogan offers a few additional ways business owners can cut down on their tax bill.

How to save on Corporation Tax as a limited company

Some of the best — and lesser known ways — to cut down on your Corporation Tax bill include the following:
    Pension contributions can be paid through your limited company directly to a Self Invested Personal Pension (SIPP) — with the entire amount contributed being totally tax deductible. Depending on how much you contribute, you can slash your Corporation Tax bill by up to £40,000 a year!Throw a Christmas party, even if your company only has the one director. HMRC allows you to claim up to £150 per director, with an additional £150 for a plus one up for grabs. To successfully claim, you’ll need to categorise this as “Other small expenses” in the Ember app.Medical health check ups, including eye checks are wholly claimable as an expense, along with any glasses purchased wholly and exclusively for business purposes. You can claim for treatment too, as long as the injury or health issue is related to your line of work.

How to save on Income Tax as a sole trader

    Pension contributions, while not classified as a business expense if you’re a sole trader, can increase your tax bands by the gross amount of you contribution. This is most effective for sole traders with a taxable income earning just above £50,270, the Higher Rate Income Tax threshold.Taking your trading allowance may be more tax efficient if you’re a sole trader with less than £1,000 in expenses. Take for instance you only have £400 expenses in a tax year — rather than claiming them as allowable expenses, you can shave £1,000 off your tax bill by opting to use your trading allowance instead.

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