Research and development tax relief ― capital expenditureRelief for research and development expenditure differs depending upon whether the expenditure is capital or revenue in nature (see the Capital vs revenue expenditure guidance note). Relief for revenue expenditure also differs depending upon whether the company qualifies as an SME or not. The available reliefs can be summarised as follows:•R&D allowances (RDA) which allow full relief for qualifying capital expenditure in the year that it is incurred•R&D tax reliefs which allow relief for qualifying revenue expenditureIt is important to note that R&D tax relief for revenue expenditure is not available to unincorporated businesses or individual hobbyist inventors ― only to companies. The RDAs for capital expenditure are available for companies and unincorporated businesses, provided they are carrying on a trade.This note discusses the relief available for capital expenditure. For the relief available for qualifying revenue expenditure, see the Research and development (R&D) expenditure ― overview guidance note.See also Simon’s Taxes B3.7 for further details.Relief for capital expenditureWhat is qualifying expenditure for RDAs?R&D for these purposes is defined as activities that fall to be treated as such in accordance with GAAP and that satisfy the conditions set out in the guidelines issued by the Department of Trade and Industry (DTI). Essentially, R&D that qualifies for the tax relief for revenue expenditure will also be R&D for capital allowances purposes (see the Definition of research and development guidance note for further details). In
Struggling businesses ― how to ease cash flowIf OMBs are struggling to maintain their cash flow and are maybe looking to obtaining debt from outside sources, this guidance note provides a summary of tax areas that can be reviewed with your OMB corporate clients that can help with cash flow and accessing funds.Maximising capital allowance claimsCapital allowances are a valuable tax relief for OMBs, and maximising any claims can help improve cash flow. Specific areas to review are as follows:Super-deduction and special rate first year allowanceThe super-deduction and special rate first year allowance (SR allowance) are temporary reliefs available to companies which incur qualifying expenditure on plant or machinery between 1 April 2021 to 31 March 2023. There is no upper limit to the level of expenditure that attracts these allowances.The reliefs operate as follows:•a super-deduction of 130% allowances is available on new plant or machinery that is not special rate expenditure, ie it would ordinarily qualify for the 18% main rate writing down allowance, and•a first year allowance of 50% on new plant or machinery that qualifies as special rate expenditure, ie it would ordinarily qualify for the 6% rate writing down allowance. This is called the SR allowanceWhere assets are disposed of, on which either of these reliefs were claimed, there will be a balancing charge on disposal. The calculation of the balancing charge is different depending on which relief was originally claimed.For more details, see the Super-deduction and special rate first year
Transfer of business premisesThis guidance note summarises the factors to take into account on the transfer of business premises as part of a trade and asset sale. Please also refer to the Capital allowances ― property transactions and fixtures guidance note.Capital allowances ― fixturesBuildings usually contain fixtures, ie items which are attached or placed permanently in the building. Examples of fixtures include:•lifts and escalators•heating, lighting and electrical systems•alarm systems•sanitary appliances, and hot and cold water systems•telephone and data installationsThe availability of capital allowances on such items for the purchaser of the building will depend on whether the previous owner could have claimed capital allowances, the original cost of the fixture and what disposal value has been brought into account on a previous disposal. In most cases, the capital allowance claim will depend on the seller having pooled the fixture and a value for the fixture being fixed by means of a joint election, usually under CAA 2001, s 198 but sometimes under section 199. It is important therefore to ensure these formalities have been done and documented within the required timescales and that the purchase contract reflects the requirement for the seller to pool any fixtures within their tax computations. More details of the capital allowance rules on fixtures can be found in the Capital allowances ― property transactions and fixtures guidance note.Buildings allowancesWith effect from 29 October 2018, a type of capital allowance is available
Capital allowances for sole traders and partnershipsSome aspects of capital allowances only apply to sole traders and partnerships, these are as follows:•private use of assets which qualify for capital allowances eg cars•capital allowances on know-how•capital allowances on patentsEach of these is detailed further below.Private use adjustmentsSole traders or partnerships may use assets for both business and private purposes. For example, it is common for a sole trader to have a car which is used mainly for business, but at the weekends or in the evenings, used for private purposes. If all the costs of running the car are paid for by the business, the tax computations must be adjusted to take account of the private use. Therefore, motor expenses in the profit and loss account are reduced for the private element of those costs.Likewise when considering the capital allowance computations, the capital allowance must be reduced by the private element. The private element is normally given as a percentage which is then applied to the computations. In practice, the private usage may need to be agreed with HMRC.This is only applicable where the car is owned by the sole trader or partner. It is necessary to consider whether this is the case, or whether the car is in fact leased. See the Capital allowances on cars guidance note for further information.Private use adjustments never apply to companies.The director of the company might use a company car for his private purposes. However, this will not
Introduction to year-end tax planningIntroductionThis guidance note considers various aspects of year-end tax planning for large companies or groups. It is recommended that it is read in conjunction with the Chargeable gains planning, Group companies and Year end tax planning ― international issues guidance notes so that as many relevant factors as possible are considered. See also ‘Key issues for in-house tax teams: a checklist’, by Chris Holmes, Mark Ellis, and James Egert, in Tax Journal, Issue 1511, 14 (27 November 2020).Other matters which could be relevant, depending upon the tax profile of the company, are:•whether deductions for expenditure on intangible fixed assets (IFAs) are being maximised ― see the What is an intangible fixed asset? guidance note•whether deductions for loan relationships are being maximised ― refer to the What is a loan relationship? and Taxation of loan relationships guidance notes•real estate investment trusts (REITs) ― for the advantages and disadvantages of this regime to companies in the property sector, see the Real estate investment trusts (REITs) guidance note•review of time limits for claims and elections ― see Simon’s Taxes D1.1345When undertaking any planning exercise, companies and their advisers should consider whether any relevant anti-avoidance provisions, Disclosure of Tax Avoidance Schemes and the General anti-avoidance rule are likely to apply. See the Disclosure of tax avoidance schemes (DOTAS) ― overview and
Income tax implications of incorporationThe Incorporation ― introduction and procedure guidance note summarises various tax implications of incorporating a business. This note provides further details of the income tax aspects which include:•closing year rules / overlap profits•capital allowances•stock•loss relief optionsThese are covered further detail below.Closing year rulesThe incorporation of a business by a sole trader or partnership brings about a cessation of trade for income tax purposes. The closing year rules will therefore need to be considered, including relief for overlap profits.In particular, if the overlap profits are significantly greater than current profits for an equivalent time period, the cessation of the trade may trigger a substantial loss for which no relief is available. Careful choice of cessation date may help with this issue.See Example 1 and Example 2 for illustrations of cessation planning. For more guidance, see the Basis of assessment ― closing years guidance note.Capital allowancesIf any plant and machinery is purchased in the final accounting period, no annual investment allowance (AIA), first year allowances or writing down allowances are available in that period. Where a trader has made substantial investment in capital items in the final period of trade, there is clearly an issue especially where profits are available which could be reduced by capital allowances. Consideration should therefore be given to delaying incorporation until after the end of the tax year.For example, a trader with a year-end of 31 March 2021 who has
Property losses for individualsFor income tax purposes, rental profits from land and buildings are categorised as either:•a UK property business, or•an overseas property business, see the Overseas property business for individuals guidance noteEngland, Wales, Scotland and Northern Ireland make up the countries of the UK. The Isle of Man and the Channel Islands are treated as overseas for the purposes of the legislation.This means that UK rental profits are pooled together and reported as one business, and overseas rental profits are pooled together and reported as one business. This guidance note refers to a UK property business, but the rules apply equally to an overseas property business.The exceptions to this are:•furnished holiday lettings which are calculated and reported separately, see the Furnished holiday lets guidance note•properties let at an uncommercial rent, as the expenses are limited to the amount of the rent, see the Allowable expenses for property businesses guidance noteUK property businesses are considered further in the Taxation of property income for individuals guidance note.This guidance notes looks at the income tax rules around property losses. For corporation tax rules on property loss relief, see the Property business losses for companies guidance note.Calculating a lossProperty business losses are calculated in the same way as property business profits. From 2017/18 onwards, there are two possible bases that can be used to calculate property business profits and losses:•the simplified cash basis, which is the default
Preparing the group for sale or acquisitionWhat are the pre-completion tax issues?In many cases, the decision to sell a company is taken over a long period, during which there is an opportunity for pre-sale tax planning. This may be necessary if a purchaser only wishes to acquire certain assets or companies within a group, or the vendor wishes to retain certain assets or companies. This will be a matter for negotiation between purchaser and vendor.Depending upon the nature of the transaction, there will be a range of tax matters to consider, not least the amount of any tax liability arising on the profit generated by a disposal. This may include the following:•the sale of a company may have implications for income tax, corporation tax and inheritance tax; maximising potential reliefs is likely to be key•the historic tax position and amount of tax losses of the company being sold (target) may affect the price•the sale of the target will have consequences for the group of companies out of which it is sold•the vendors will be required to give warranties concerning the business and assets of the target (including the tax position) and will need to decide how much of the sale price they are prepared to leave outstanding on deferred terms•the vendor will wish to consider the best form of consideration from a commercial and tax perspectiveSome of the relevant tax planning considerations are set out below.Transfer of a trade without a change in ownershipThe
Super-deduction and special rate first year allowanceThe super-deduction and special rate first year allowance (SR allowance) temporarily increase reliefs for companies on qualifying expenditure on plant or machinery from 1 April 2021 to 31 March 2023. They were introduced at Budget 2021 and are included in the Finance Act 2021 changes. HMRC guidance can be found at CA23162 onwards. These are valuable reliefs where the date of expenditure is important for the asset to qualify so businesses will need to maintain records of dates of acquisition especially for larger projects that span 1 April 2021 and 1 April 2023.The additional reliefs are split into two types:•a super-deduction of 130% allowances on new plant or machinery that is not special rate expenditure, ie it would ordinarily qualify for the 18% main rate writing down allowance ― see the Capital allowances computations guidance note, and •a first year allowance of 50% on new plant or machinery that qualifies as special rate expenditure, ie it would ordinarily qualify for the 6% rate writing down allowance ― see the Special rate pool and long life assets guidance note. This is called the SR allowance in the legislationFA 2021, s 9The capital allowance section of the CT600 has been updated to include a box for the claims.Where assets are disposed of, on which either of these reliefs were
Disposal of premisesThis guidance note explains the various aspects which need to be considered in relation to a company’s disposal of premises and the calculation of the chargeable gains position.The calculation of the tax position for a disposal of land and / or buildings will generally be computed in the same way as any other asset. For a general overview of the capital gains position of a company and the calculations required, please refer to the Calculation of corporate capital gains guidance note.Disposal proceedsWhere the disposal takes place between connected parties, or the asset is disposed of otherwise than by a bargain at arm’s length, the actual consideration is ignored and the market value of the asset is taken to be the proceeds for tax purposes. For further guidance on what constitutes a disposal between connected parties and circumstances where the market value of the asset should be substituted for actual consideration, please refer to the Connected party disposals and Assets gifted to employees or shareholder family guidance notes.Part disposalsWhere only part of a company’s holding is disposed of, it is necessary to apportion the allowable cost under the part disposal rules using the following formula:A = gross disposal proceedsB = market value of the part retained at the date of disposalTCGA 1992, s 42There are special rules that may apply to the part disposal of land which provide relief against the potential chargeable gains. See the
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