Tax advantages for those starting up in business

New businesses can benefit from a variety of tax allowances and reliefs which could cut their tax bill.

They include capital allowances for investment in equipment and premises, tax relief and credits for spending on research and development and stamp duty relief on residential properties in disadvantaged areas.

But you won’t automatically receive these tax advantages. You need to find out what you can claim and then apply for them.

This guide gives an overview of the schemes available and tells you where you can find out more.

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Details of tax advantages for new businesses

There is a range of tax advantages which businesses may be able to use to reduce their tax bill.

Regional Employer National Insurance contributions (NICs) holiday for new businesses

New businesses that start up in specific targeted areas may be able to get a substantial reduction in their employer NICs under new plans announced by the government.

Download frequently asked questions on the proposed NICs holiday from the HM Revenue & Customs (HMRC) website (PDF, 46K)- Opens in a new window.

Business rate discounts

Businesses that start up in one of the 21 new enterprise zones, or relocate to one over the course of the Parliament, will qualify for a 100 per cent business rate discount for five years. This discount could be worth up to £275,000 over five years. New businesses not located in an enterprise zone may qualify for small business rate relief. See our guide on business rates relief.

Capital allowances available to all businesses

If you buy an asset – eg a car, tools, machinery or other equipment – for use in your business, you cannot deduct your expenditure on that asset from your trading profits. Instead, you may be able to claim a capital allowance against that expenditure.

Capital allowances are also available for expenditure on converting space above commercial premises to flats for short term renting, donations of used business assets to charity, assets for research and development, and certain other items.

Capital allowances are available to sole traders, self-employed persons or partnerships, as well as companies and organisations liable for Corporation Tax. They are available to both new and existing businesses.

For more information on types of expenditure you can claim and how to go about it, see our guide on capital allowances: the basics.

Equipment lent to employees

Tax and National Insurance contributions are not payable on the value of any office services, equipment and consumables used by employees for business purposes. The benefit must be provided in the employer’s premises and any private use of the benefit by employees must not be significant. Where the benefit is provided elsewhere (for example to enable the employee to work from home) the benefit must be used for business purposes and any private use of the benefit must not be significant.

Tax relief and credits for research and development

Research and Development (R&D) Relief is a Corporation Tax relief that may reduce your company or organisation’s tax bill by more than your actual expenditure on allowable R&D costs.

Alternatively, if your company or organisation is small or medium-sized, you may be able to choose to receive a tax credit instead, by way of a cash sum paid by HMRC.

R&D Relief can only be claimed by companies and organisations that are liable for Corporation Tax.

Find out if you qualify for R&D Relief in our guide on Research and Development (R&D) Relief for Corporation Tax.

Enterprise investment scheme

This scheme helps certain types of small unquoted companies to raise capital by providing tax relief for investors in these companies. Read more about the Enterprise Investment Scheme on the HMRC website.

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CASE STUDY

Here’s how the tax authorities helped me start my business

Rachel Jones co-founded Great Circle Communications Limited, an Edinburgh-based reputations management consultancy, in 1998. Rachel explains how it quickly became clear that understanding tax issues was a top priority.

What I did

Sign up for HM Revenue & Customs courses

“If we were trying to build up other people’s reputations, it was important we could look after our own, so getting the business’ tax affairs right from the word go was essential.

“Our local HM Revenue & Customs office runs half-day courses and I took advantage of several of these in Great Circle’s early days. I went on ones covering how to pay yourself, how to pay employees, maternity leave and sick leave.

“They’ve proved very helpful. I don’t remember everything but it means when my accountant talks about tax matters I at least have an idea about the basics.

“The courses were free too – I’d have been crazy not to go on them.”

Invite the VAT inspector into the business

“Although we started the business from home with just one computer on the kitchen table, we knew we wanted to be VAT registered from the start. People expect to pay VAT in consultancy and having a VAT registration number positions you as a serious player. But VAT was double Dutch to us.

“We came across an HM Revenue & Customs stand at an exhibition where we chatted to the VAT inspector who agreed to come and visit us. I remember he sat in our living room – also our meeting room at that point – and gave us a presentation. He was very approachable and answered all our questions on what exactly attracted VAT and whether it was more advantageous to lease or buy a company car.

“Though we were VAT registered from the start, we reached the VAT threshold anyway within eight months. We were VAT inspected after three years and it was no big drama.”

Use the tax helplines

“In the early days we used the various tax helplines quite a lot. We’d ring up the VAT office, for example, and ask why postage didn’t attract VAT but you had to pass it on as a cost to clients. I’m still not afraid of ringing up and asking questions. They’re there to make sure you get things right.”

What I’d do differently

Speak to the National Insurance people

“When we started out we assumed our bookkeeper was keeping an eye on National Insurance but it wasn’t something they knew about and the result was a National Insurance shortfall and a big bill. It’s quite difficult to keep an eye on everything, but you must and for that you need to know the basics. We got the VAT right, but not the National Insurance.”