A Guide to Capital Allowances
Posted 02 November 2011 - 06:30 PM
What are capital allowances, and how can they help me to pay less tax?
If your business buys an asset (e.g. tools, machinery, vehicles or other equipment you use in your business) you are not allowed to deduct the expenditure on that asset from your gross profit in the same way that you can do with
non-taxable expenses. However you may be able to claim what are known as a capital allowance against the cost of the asset. You may also be able to claim capital allowances for qualifying research and development costs, and a selection of other areas.
The idea is to give your business tax relief against the reduction in value that your assets achieve over time, by allowing you to write off their cost against your taxable profits. Capital allowances are available to self employed sole traders, partnerships and companies.
What you can claim capital allowances for
Capital allowances can be claimed on certain assets that your business owns and uses for its day to day activities (provided certain conditions are met). You are not allowed to claim capital allowances for goods that your business buys and sells as part of its trade (e.g. stock). Some of the items you may be able to claim for include:
Plant and machinery you own and use in your business – this can include office equipment, furniture, tools, machinery, vans and computers. Different assets may be eligible for different plant and machinery allowances
Capital expenditure on research and development (including equipment used for research and development)
Gifts of equipment to charity
Certain fixtures and integral features in buildings
Conversions or renovations of empty flats above commercial premises
Renovation of business premises in certain “disadvantaged areas”
Types of capital allowances on plant and machinery
Capital allowances on plant and machinery are the most common for much business. There are a variety of different allowances available for expenditure on plant and machinery. These include:
Annual investment allowance
An annual investment allowance of £100,000 a year is currently available to most businesses on the majority of plant and machinery (excluding cars). This might mean that you are able to claim your entire expenditure on qualifying items against this allowance. Unfortunately a reduction in the annual investment allowance down to £25,000 has been announced to take place from 6 April 2012.
You are currently able to claim 100% first year allowances on the expenditure of certain types of assets. This means that you can claim the entire cost of the asset as a deduction to your taxable profit when calculating your tax liability. The types of assets that qualify are:
new cars with CO2 emissions of not more than 110 grams per kilometre driven
certain designated energy-efficient equipment
certain environmentally beneficial (currently water efficient) equipment
equipment for refueling vehicles with natural gas, bio gas or hydrogen fuel
new zero-emission goods vehicles (such as electric vans)
Writing down allowances allows you to reduce any remaining balance of capital expenditure on plant and machinery that you haven’t been able to claim on the annual investment allowance or first year allowances.
There are two key rates of writing down allowances which your assets can be grouped into:
The main pool - this includes expenditure on most items - the rate is currently 20 per cent, and a reduction to 18 per cent from 1/6 April 2012 has been announced, subject to legislation
The special rate pool - this includes special rate expenditure including long-life assets, integral features, certain thermal insulation and some cars - the rate is currently 10 per cent, and will reduce to 8 per cent from 1/6 April 2012, subject to legislation
If you would like to read about capital allowances in more details, please see the HMRC capital allowances manual.
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