Through exploring capital allowances, we will see the different types and discover the different benefits of claiming for them correctly. There is a section for frequently asked questions relating to capital allowance claims at the end of the article.Through reading this guide you’ll gain an understanding of what an allowable capital allowance claim will look like and you’ll know where to start when it’s time for you to make one.
What are capital allowances? How do you claim for them?
A capital allowance is a type of expenditure that a U.K. or Irish business can claim against its taxable profits. Capital allowances may be claimed on most asset purchases intended for use within the course of carrying out your business. This can range from equipment needed in the business, to research and development costs and the expenses relating to building renovations.
The way that assets are classified will determine whether full or partial value can be claimed and whether the allowance is deductible in one year or spread out over several years.
Businesses calculate the number of capital allowance expenses that they want to claim for during a financial period and then include that information on the tax return. The tax return is then submitted to HMRC. Depending on the type of business, the method of claiming is different and these will be in a dedicated section below. There are two main types of capital allowance, the first year allowance and annual investment allowance.
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First year allowance
The first year allowance is a tax allowance that permits UK businesses to deduct the cost of capital expenditure during the year the expenditure occurred. The amount that can be claimed is between 6% and 100% depending on the type of asset purchased.
The cost is then deducted from the profits before tax.
Eligible assets include:
- Computer and internet technology.
- Energy saving technologies.
- Certain low emission cars.
- Energy saving equipment.
- Water conservation equipment.
- Zero emission delivery vehicles.
- Hydrogen/biofuel refuelling equipment.
The first year allowance only applies where a business that makes the purchase uses them within the business. They are not eligible if the intention is to lease them out.
Annual investment allowance
The annual investment allowance is a form of tax relief for UK businesses. The intention is to allow businesses to deduct the total amount of qualifying capital expenditure from its taxable profits. There is a limit to the annual investment allowance you can claim for based on the type of business making the claim, the limits can be found here.
Eligible claims relate to the purchase of equipment for business use, such as tools and machinery. Other examples are listed below, but the list is not exhaustive:
- Office equipment, including computer hardware and office furniture.
- Building interior fixtures, such as air conditioning, kitchens and bathroom fittings.
- Lorries and/or vans.
- Machines used for the business.
- Agricultural machinery.
Assets that cannot be claimed for include such things as buildings, cars or land.
The annual investment allowance is renewed for each accounting period. The first year allowance and annual investment allowance can be claimed for in the same tax period.
If you go over your annual investment allowance or first year allowance it is possible to claim a writing down allowance if the spending is eligible.
What is a writing down allowance?
A writing down allowance is used when a business asset purchase cost is deducted from the pre-tax profit each year. It is a form of tax relief and the deduction is a percentage of the purchase cost.
The writing down allowance is used when the capital allowance limit for the taxable period has been reached, or if the asset purchased isn’t a qualifying asset for inclusion as a capital allowance.
Items to be included in a writing down allowance are grouped together into pools, based on the percentage write down rate they qualify for. The purpose of these pools is to claim the correct tax relief based on each pool and then carry the remaining balance forward each period, until the balance is paid off.
There are three different write down pools.
- Main pool, 18%.
- Special pool rate, 6%.
- Single asset, 6%-18% and rate depends on the specific item.
As an example:
- Main pool asset purchase costs £10,000.
- Eligible for 18% write down allowance, £1,800 claimed for in year one.
- Eligible for 18% write down allowance on remaining balance of £8,200 in Year 2.
- Eligible for 18% write down allowance on remaining balance £6,724 in Year 3.
- And so on…
What can you claim as a capital allowance?
You are able to claim capital allowances on items that you keep in a business for use within that business. These assets are known as plant and machinery.
What is plant and machinery? These items include such things as:
· Items that you keep for use in your business, including cars.
· Costs of demolishing plant and machinery.
· Parts of a building considered integral,
- Lifts, escalators and moving walkways.
- Space and water heating systems.
- Air-conditioning and air cooling systems.
- Hot and cold water systems.
- Electrical systems.
· Some fixtures,
- Fitted kitchens.
- Bathroom suites.
- Fire alarms.
- CCTV systems.
· Alterations to a building to install other plant and machinery, not including repairs.
It is also possible to make a claim for capital allowances on certain non-plant and machinery items, including:
· Research and development.
· Renovating properties (in disadvantaged areas of the UK).
What doesn’t count as plant and machinery? These include:
· Assets that you lease out.
· Buildings, including doors, gates, shutters, mains water and gas systems.
· Land and structures such as bridges and roads.
· Items used only for business entertainment.
How do you claim a capital allowance?
Once you have calculated your capital allowances, you claim through your:
1. Company tax return for a limited company
2. Self-assessment form for a sole trader
3. Partnership tax return if you’re a partner
The amount you can claim is then deducted from your profits.
If you want to claim the full asset value under the annual investment allowance or first year allowances then it must be claimed in the accounting period that the asset is purchased.
If you don’t intend to claim the tax relief on the full value of the asset, part of the value can be claimed under the writing down allowances.
The timing of buying the asset can be difficult to establish under some circumstances, however it is treated as:
· The date you signed the contract, if payment for the asset is due within four months.
· The date when payment is due, if it’s due more than four months later.
Common errors – Common errors that occur in capital allowance claims can include:
Not fully establishing the claim entitlement. This area of tax can be complex depending on the asset being claimed for, if you’re unsure, seek professional advice.
Having insufficient supporting documentation to justify the claim.
Over-claiming can occur by including ineligible assets or over estimating costs associated with them.
Under-claiming can occur by not including all eligible assets. This might be because you assume an asset won’t be accepted or not keeping hold of the supporting documentation you need to support the claim.
The implications of errors – By over-claiming HMRC may reject your claim, leaving you open to repayment of taxes due and possible interest and penalties. In the event of under-claiming your business is leaving behind cash that could otherwise be diverted back into the business.
What are the benefits of claiming capital allowances?
There are serious benefits to claiming capital allowances. These include
1. Getting an immediate tax benefit, reducing and potentially offsetting another tax liability.
2. Improving cashflow and keeping cash within the business.
As with any tax issue, it’s always advisable to get professional advice to ensure that your claims are as efficient as possible. Otherwise, you might be understating your capital allowances and leaving behind cash unclaimed that you are entitled to. This is particularly important when it comes to timing and ensuring you claim for the full amounts in the year that assets are purchased.
Capital allowance FAQs
1. Is there an exhaustive list of what qualifies as plant and machinery?
No, there is no specific approved list. Plant and machinery are not defined in legislation so identifying qualifying assets is not always straightforward. When unsure it is always best to consult a professional advisor, this will help under claiming or over claiming, both of which can have material financial implications.
2. How can plant and machinery be identified?
Plant and machinery can be identified by relating to the facts relating to the purchase of the asset. Such as the nature of the transaction and the function of the asset in the transaction. There are a number of conditions/tests to help when the asset in question is not straightforward to identify.
3. Do all fixed asset additions qualify for a capital allowance?
All capital expenditure does not necessarily qualify as eligible under capital allowance schemes.
4. Can you claim for capital allowances that occurred in the past?
This is highly dependent upon the facts and circumstances but it is possible that you may be able to go back to amend your tax return to include the allowances. Professional advice should be sought to establish if this is allowable or not.
5. What happens if you don’t have any information relating to the asset purchase, can you still claim?
There has to be evidence to support all capital allowance claims. A professional accountancy service may be able to help construct supporting evidence if this has been lost.
Capital allowances are an important aspect of tax relief that it’s vital businesses understand. Although not always straightforward, taking the time to correctly construct your company tax return to include capital allowances is important, otherwise you could be missing out on cash that could be used for other things within your business.
There are some key points raised in this blog that you should take away:
The U.K. government allows certain business expenditures to be deducted from tax as capital allowances.
The cost of some assets can (and should) be deducted from taxes in the accounting period in which the asset is bought.
The cost of other assets can be spread over multiple years using a writing down allowance pool.
Eligible capital allowance categories include research and development, equipment, plant and machinery and some vehicles used by the business.
The list of non-eligible assets includes those used for entertainment, those that are leased out and office supplies.
As with any other issues relating to tax, it can be important to appoint the right advisor to ensure you get the very best guidance and make your tax claims as efficient as possible. Finding a knowledgeable and trusted accountancy partner for your business will help you stay up to date with all the latest industry regulations and laws, meaning you won't ever leave money unclaimed.
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