The expenses you incur in your business can either be revenue (trading) expenses or capital expenditure. Normally, if an item will have a lasting benefit for the business (longer than a year) it will be capital expenditure.
What are capital allowances?
Capital allowances are a way of obtaining tax relief on some types of capital expenditure. They’re treated as a business expense and so reduce your taxable profit. They’re given by reference to ‘periods of account’.
Does all capital expenditure qualify for capital allowances?
No. The expenditure must be on a particular type of asset.
Also, you usually need to own the asset on which the capital allowances are claimed. In other words, if you hired or leased the asset, capital allowances may not be claimed, but you may be able to obtain tax relief on the rental costs as revenue expenditure.
(Further information about tax deductible revenue expenditure can be found here.)
Hire purchase and finance leases
There are special rules relating to assets acquired on hire purchase or finance leases. Generally, these assets are treated as belonging to the person using them, even though legal ownership may not pass until a final payment is made at the end of the contract. Any interest on hire purchase items is a trading expense and not part of the capital expenditure. (Tax relief could be obtained for the interest as a normal trading expense however.)
What is ‘qualifying expenditure’?
Qualifying expenditure for capital allowances purposes, is capital expenditure incurred on plant or machinery that is wholly or partly used in the qualifying activity carried on by the company incurring the expenditure. Where plant and machinery is acquired before the qualifying activity begins, it is treated as incurred for capital allowances purposes on the date on which the qualifying activity actually commences. We look at this question in more detail further on in this guide.
Activities that are ‘qualifying activities’ for capital allowances purposes include:
- A trade
- A UK property business (other than a furnished holiday letting business)
- A UK furnished holiday lettings business
- An overseas property business
- A profession or vocation
- An employment or office
Capital allowances are calculated separately for each qualifying activity carried on by a person.
How do I claim capital allowances?
They must be claimed in your tax return and they must normally be claimed by 12 months after the filing deadline for the return.
If a tax return has already been filed, it will be necessary to file an amended return to make or change a capital allowances claim. This is only possible within 12 months of the original filing deadline for the return.
How do I find out what types of expenditure qualify?
In this guide, we’ll look at plant and machinery allowances only, but you can find out about other types of allowances at GOV.UK.
The most common assets you may purchase and that will qualify for capital allowances are as follows:
3. Computer, printer, copier, etc.
4. Tools (e.g. lawnmower, saw, etc.)
5. Specialist machinery
The main items that will NOT attract capital allowances include the cost of buildings or property, although it is possible that part of the cost of the building might relate to integral features or to fixtures, for which it may be possible to claim.
You’ll only be able to claim capital allowances relating to a building (and not for the building itself), if both of the following are correct:
1. It’s not a residential property
2. The property is used for business purposes (e.g. an office or shop)
There are special allowances for energy efficient or environmentally beneficial plant and machinery.
These special allowances are called first-year allowances, where 100% of the cost can be deducted from taxable profits in the year of acquisition.
These allowances are available in respect of energy and water-efficient equipment including:
1. Some cars with low CO2 emissions
2. Energy-saving equipment that’s on the energy technology product list, e.g. certain motors
3. Water-saving equipment that’s on the water efficient technologies product list, e.g. meters, efficient toilets and taps
4. Plant and machinery for gas refuelling stations, e.g. storage tanks, pumps
5. Gas, biogas and hydrogen refuelling equipment
6. New zero-emission goods vehicles
The list of qualifying assets changes regularly, so you should check carefully before making a claim. More information can be found here.
What are integral features?
Integral features are fittings within the building that can’t easily be removed; for example, cold-water systems, electrical systems including lighting systems, heating or ventilation systems, etc.
Capital allowances are available for integral features, but at the reduced rate of 8%. Integral features are included in the special pool for capital allowances purposes (see below).
What are fixtures?
These are items that could be removed from a building without too much difficulty, for example shelving. Capital allowances are available on fixtures.
What rates are Capital Allowances given on plant and machinery?
The normal allowance is a writing down allowance of 18%, or a special pool writing down allowance of 8%.
What's a writing down allowance?
It’s a way of giving tax relief on part of the value of assets held in a pool. An example may make this clearer.
Baldric has a capital allowances pool brought forward of £24,000 before claiming any allowances for 2016/17.
If he has no additions or disposals of assets during that year, his claim for capital allowances would be:
Written down value brought forward £24,000 Writing down allowance (18%) £4,320 Written down value carried forward £19,680
So, Baldric can claim a writing down allowance of £4,320 and deduct that from his profits for tax purposes.
What items will be in the special rate pool?
Items in the special rate pool are only eligible for a writing down allowance of 8% each year.
The main items in this pool will be longlife assets (assets with a life of more than 25 years), integral features and cars with higher carbon dioxide (CO2) emissions.
You can look on the GOV.UK website to find the actual levels of CO2 emissions of cars, which decide what allowances you can claim.
What's the annual investment allowance?
The annual investment allowance (AIA) provides 100% tax relief on assets qualifying as plant and machinery, subject to an annual maximum (and excluding cars). The current AIA is £200,000 per annum.
What happens when I purchase an asset but can't get AIA?
If you purchase an asset but have already used up your annual investment allowance for the period, or the asset does not qualify for AIA, it will need to be added to the main capital allowances pool.
Look at the example above with Baldric again.
Now assume that in 2016/17 he buys assets that use up his annual investment allowance, leaving £12,000 to be added to the general pool.
His capital allowances computation for the general pool would be as follows:
Written down value brought forward £24,000 Add: purchased £12,000 £36,000 Writing down allowance (18%) £6,480 Written down value carried forward £29,520
So, Baldric can now claim a writing down allowance of £6,480 and deduct that from his profits for tax purposes.
What happens when I sell an asset?
If you sell an asset, you deduct the sales proceeds from the balance of the pool, but you cannot deduct more than the original cost of the asset.
In most cases, AIA will previously have been claimed; and as these assets would ordinarily have formed part of the writing down allowance pool, the proceeds must go through this main pool.
Let’s look at another example:
Peter has a general pool balance brought forward of £10,000. He sells a machine during the year for £1,200 (it had originally cost £3,500) and AIA had been claimed at the time in respect of this. His capital allowances computation for the general pool would be as follows:
Written down value brought forward £10,000 Less: sold £1,200 £8,800 Writing down allowance (18%) £1,584
Written down value carried forward £7,216
Peter can claim a writing down allowance of £1,584 and deduct that from his profits for tax purposes.
What happens if the sale proceeds are more than the balance on the general pool?
If you deduct the sale proceeds of the asset on which you’ve previously claimed AIA from the general pool, and that makes the balance on the main pool negative, then instead of a capital allowance, a balancing charge is generated - this is an amount that is added to profits rather than being deducted from them.
Here’s a helpful example:
Jane has a main pool balance brought forward of £1,500 at 6 April 2016.
During the year 2016/17, she sells an item of equipment for £2,200.
The equipment previously attracted a 100% allowance.
Written down value brought forward £1,500 Less: sold £2,200 Balancing charge £700
Therefore, Jane has £700 to add to her profits for 2016/17. She will then calculate her tax liability on her adjusted profits including the additional £700 balancing charge which will be added to her taxable profits.
Where can I find out more information about capital allowances?
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