Capital allowance relief may be available on assets purchased for use in your business, such as transport vehicles, machinery or equipment.
Any claimed amount may then be deducted from your taxable profit.
A broad range of assets can be claimed for, though there are exceptions not eligible for a capital allowance claim, including:
- Items you do not own but instead rent from a third party
- Buildings, and any related doors, gates, shutters, mains water or gas systems
- Land
- Structures other than buildings such as a bridge or a road
- Business entertainment items
The tax legislation that governs capital allowances is detailed, complex and regularly updated. It is important, therefore, to maintain an ongoing awareness of exactly which capital allowances are applicable to your purchases and tax situation.
Types of capital allowance
There are several categories of capital allowance, so before you make any claim against an eligible business asset, it is always worthwhile investigating which scheme is suitable for your circumstances.
Most capital allowance claims are made under one of the following:
- Annual Investment allowance (AIA)
- Writing Down allowance (WDA)
- Small Pools allowance
- Structures & Buildings allowance (SBA)
- First-year allowance (FYA) for electric car charging points
- Enhanced capital allowances for Enterprise Zones
Ensuring that your claim is made through the correct capital allowance scheme will not only mean that you comply with HMRC tax legislation but can improve your overall tax efficiency.
Annual Investment Allowance
The Annual Investment Allowance allows you to deduct 100% of the item’s value from your profits before tax. The AIA is set at £1 million.
A claim made through AIA provides the full value paid for any eligible asset up to the AIA limit. The amount claimed may then be deducted from your taxable profit.
General and special rate equipment can be claimed for under AIA and there are also a number of green initiatives which may be eligible for relief.
Business assets that are not eligible for claiming under AIA include:
- assets already in your possession that you later used in your business
- assets that were given to you or to your business, rather than being purchased by you or your business
- cars
The above items should generally be claimed for through WDA instead.
To work out the amount you can claim through AIA, total up the cost of any eligible purchases made within that tax year. If your total is less than the AIA limit, you can in effect claim 100% of the value of your purchased assets for that year, as long as they are eligible for AIA.
Where your total is more than the AIA limit, and the purchased assets are eligible (such as for cars, items given to your business or items owned by you for another reason than using in your business), it may be possible to claim through a Writing Down allowance instead.
Writing Down Allowance
Under WDA, a percentage of the cost of eligible business purchases can be claimed for. The specific percentage will depend on the asset itself.
When making a WDA claim, it is necessary to group the purchased assets into pools of items that bear the same percentage claim rate.
The resulting amounts for each pool may then be deducted from profits declared on your tax return for that year.
The remaining amount in each pool will form the starting balance for the following tax year or accounting period.
The pool rates are:
- main pool – 18%
- special rate pool – 6%
- single asset pool – 18% or 6% depending on the specific asset
Where a purchased asset is not suitable for AIA, WDA may be used for certain items, including personal belongings that are later used in a business, gifts and cars.
Small Pools Allowance
In certain circumstances, it may prove more tax efficient to make a Small Pools allowance claim, rather than WDA.
Where your total claim for purchased business assets exceeds the AIA limit, and the value of a pool, prior to the WDA calculation, is below £1,000 for a tax year, it may be possible to make a Small Pools allowance claim instead of a WDA claim. The balance of the small pool will then be written off.
Balancing Allowance
If you claim for an asset and then later cease to use that asset in the business or dispose of the asset, it may be necessary to make adjustments to your capital allowances.
Balancing allowance
Where a loss is incurred in relation to the asset, it may be possible to deduct this from your taxable profit. This is known as a ‘balancing allowance’. To calculate a balancing allowance, deduct the sale price or market value from the purchase price, less the capital allowance claimed in the year before.
Balancing charge
Where the sale price or market value is more than the value of the pool, this will result in a ‘balancing charge’, resulting in an additional amount that must be added to your taxable profits.
Author
Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.
Gill is a Multiple Business Owner and the Managing Director of Prof Services Limited - a Marketing & Content Agency for the Professional Services Sector.
