Guide to: What are Capital Allowances?
16th April 2019
What are Capital Allowances?
Capital Allowances form a type of tax relief that can be claimed when you buy longer-term assets that you keep to use within your business. This includes assets such as machinery, equipment and business vehicles.
Sole traders, partnerships and limited companies can claim Capital Allowances. If you are classed as self-employed sole trader or partner, then you will declare your Capital Allowances within your annual personal/partnership tax return. As a Director of a limited Company then you should make any claims through your Company tax return.
Unlike lower-value, typical business expenses, these more expensive assets are usually held in the company balance sheet, with the value depreciated over time. Each year, a chunk of this cost moves from the balance sheet to be classed as an expense called “depreciation”, thus reducing the company’s profit for that year. Typically the expense of an asset is claimed over around 4-5 years through use of depreciation in this way, though accountants can pick particular methodology to suit the business needs.
However this depreciation cost cannot be claimed as a tax relief, so HMRC has its own method of depreciation in the form of “Capital Allowances”, which allow the business to deduct the item cost as a “capital allowance” from its profit before working out the tax.
What can be claimed under Capital Allowances?
Vans, specialist tools and machinery are all items that can be claimed as capital allowances. A full list of items can be found here.
Typically the cost of buildings and property do not qualify, though if they are classified as an “integral feature” that can not easily be moved; such as a lift, escalator or air conditioning system, then you may be able to claim.
You can also claim for some fixtures such as fitted kitchens, bathroom suites and alarm/CCTV systems, so long as you have physically bought the item. If you bought a feature or fixture from a previous business owner, then you can only claim for the item if they originally claimed for it and you must agree the value of the item with the seller in order to claim.
You also can’t claim for anything that you lease and, if you are a sole trader or a partner with an income of £150,000 or less, then you may be able to use a simpler, cash-based accounting system and you will not be able to claim capital allowances for the cost of company cars.
What is the total that can be claimed?
This is a complex calculation that should be left to professionals, as there are many variations depending on the type of allowance used, the year in which it will be applied and the actual asset itself. Broken down, Capital Allowances fall into three broad categories.
The Annual Investment Allowance (AIA)
100% of the cost of any plant, non-car vehicles and machinery can be claimed through AIA by a business so long as it is claimed in the same year that it is purchased. For Jan 2019 – Dec 2020 the maximum claim amount is £1million 0 the amount for each claim year varies so you will need to ensure that you apply the correct one https://www.gov.uk/capital-allowances/annual-investment-allowance Importantly, you can still claim AIA even if the business is loss-making as the loss can still be carried forward to use against future profits.
Any pre-owned assets aren’t eligible and, if you sell the item once you have claimed AIA, then it will still be subject to tax liabilities.
First Year Allowances
When purchasing an asset qualifying for first year allowances then you are able to deduct the full cost of the asset from your profits before tax. First year allowances are allowed to be claimed in addition to the Annual Investment Allowance – and don’t count towards the AIA limit.
A particular type of asset that can be claimed for within First Year Allowances is known as “Enhanced Capital Allowances” and includes assets that encourage energy or water efficiency, including some cars with low co2 emissions, water or energy saving equipment and zero-emission goods vehicles. You can find a comprehensive list of what can be claimed for first year allowances here.
Writing Down Allowances
Writing Down Allowances consist of the standard rates of tax relief that can be claimed for capital assets in the instance where AIA was not used to claim 100% within the first year. Until the point that the asset is used up, you can claim a percentage of the remaining value (not the initial cost) of the asset each year.
Depending on the asset for which you are claiming, items are grouped into “pools” by HRMC, each with a different applicable rates. The current “pool” rates at the time of writing this article are:
- Main pool – 18%
- Special rate pool – 8%
- Single asset pools – 18% or 8% (depending on the item)
Understanding which items belong to which pool can be complex, and you should seek the assistance of a qualified accountant or financial professional to help you with this. As a general guide, a list of pools and qualifying items can be found here
We hope that this article has given you an overview of what are Capital Allowances. As with all complex financial areas, we advise to seek professional advice from your accountant or financial consultant. Our team is up-to-date with the latest legislation and has considerable expertise in understanding how to apply Capital Allowances correctly depending on a business’ individual circumstances.
