When you purchase large equipment or vehicles for your business you are not able to take the full cost of these in the first year and this means you are not able to reduce your taxable profit for the cost of the asset. However, HMRC has mechanisms available to claim a tax deduction for these items. See our previous blog post of Fixed Assets to see the accounting treatment for these items.
Capital Allowances can be claimed on assets that you buy to keep and use in your business, this can be things like machinery, equipment and vehicles. Capital allowances reduce your taxable income so reduce the amount of corporation tax that you need to pay.
To claim Capital Allowances you need to know the value of an item, this will be what you paid for the item. If the asset is something that you transfer in to the business that you owned previously the value of the item should be the market value of an item, for examples for vehicles you can use Auto Trader or similar sites to get an estimate of the market value that you can use for claiming calculating capital allowances.
You cannot claim capital allowances on things that you lease, buildings or land and structures. You must own the item and it should be plant and machinery. Furthermore you can only claim for items that you keep to use in your business, not for items that you buy and sell through the business on a regular basis. It is also possible to claim for Integral features of a building that you own, for example lifts and hot water systems but the rules on these are slightly more complicated.
Annual Investment Allowance
A form of capital allowances is the Annual Investment Allowance (AIA), this allows you to deduct the full cost of an item in the year that you buy it (you cannot claim it in subsequent years).
However you cannot claim this on cars, items that you owned before you started the business or that you transfer in to the business that you owned previously, or items that you are given. Writing Down Allowances (WDA) must be claimed on these things instead.
The total amount you can claim each year is £200,000 for a 12 month period. If you spend more than this you can claim writing down allowances on the remaining amount.
Items that you use personally are not eligible for full AIA, for example if you use a laptop 25% of the time for personal reasons you can only claim 75% of the value of the laptop.
Writing Down Allowances
WDAs is when you deduct a percentage of the value of the item from your profits each year, these are used when you cannot claim AIA. As discussed above the value of the item is what you paid for an item, unless it was a gift or owned previously when you use market value.
Assets need to be grouped in to pools of similar items and a set percentage rate is applied to the pool. The amount left in each pool at the end of a year is the starting balance for the next year.
The 3 pools used are:
- Main rate pool at 18%
- Special rate pool at 8%
- Single asset pools at 8% or 18%
The main rate pool is everything that is not included in the special rate pool or single asset pools. Things go in to special pools if they are long life assets, integral features of buildings, or cars with CO2 emissions of more than 130g/km.
Items are added to the pool as they bought by the business and taken out of the pool if they are sold by the business.
For further details on how capital allowances work and what you can claim get in touch with 2 Sisters Accounting and we will be happy to help.