(Well almost, your accountant knows the rest)
You might associate the term capital allowances with business expenditure and taxation and think it has something to do with bigger businesses and those which purchase machinery and vehicles.
Capital allowances are a consideration for every business, regardless of their size, sector or operating methods.
Whilst this article is not a comprehensive guide to capital allowances, it will cover the rudimentary information you need to know as a business owner or director. It will also help you ask your accountant or tax adviser the right questions.
HMRC has the full topic covered in a series of helpsheets, and there are webinars, e-learning and other resources at: https://www.gov.uk
What businesses spend money on, trading expenditure vs capital expenditure
Business expenditure falls into two categories.
Money spent by the business on the things that make it possible to trade, such as wages and materials, is trading expenditure. Money spent on the things the business owns, such as a delivery vehicle, is capital expenditure.
Capital allowances are a form of tax relief on capital expenditure for UK and Irish businesses that allow some or all of the cost of business assets to be deducted from profits before tax.
The idea is to encourage businesses to reinvest the tax they save by claiming capital allowances into new or additional assets, promoting business growth and efficiency.
Capital allowances are claimed through the annual self-assessment tax return. They apply to the full or partial cost of qualifying assets and are deductible over one year or several, depending on the type of asset.
There’s no time limit for claiming, as long as the asset is owned and used by the business (although there are certain advantages to claiming in the first year of ownership).
Assets that qualify for capital allowance relief include plant and machinery but don’t think you’re not eligible if you don’t have a digger in the backyard! Computers, office tech equipment and furniture are all classified as ‘plant and machinery’.
The scope for claims is probably wider than you think!
Business property is another area where the scope for relief is wider than you may think. Repairs, renovations and conversions of existing commercial property for your business qualify for capital allowances. That includes the costs of demolishing all or part of a building or clearing the site for a new building. The construction costs of new buildings can also be claimed. But it doesn’t include the cost of purchasing the land or site in the first place.
It’s not just the building itself, or the assets it houses. Thermal insulation, electrical systems, lighting, heating, ventilation, air-conditioning, elevators, and solar panels all qualify; the list is frequently reviewed and extended to encourage investment in green technologies.
Types of Capital Allowance
Without getting bogged down in the nitty-gritty, there are two main classifications of capital allowance:
Annual Investment Allowance (AIA)
Annual investment allowance allows a business to deduct 100% of the value of most items purchased for sole use by the business in the same tax year as they were acquired. The annual limit for claims is £1,000,000.
First-Year Allowance (FYA)
First-year allowance is an enhancement to AIA as it applies on top of the standard AIA amounts for certain assets but only for the first year of ownership. This group of assets includes energy-efficient vehicles, plant and machinery.
Actually, there’s a third group…
If you can’t claim either AIA or FYA, there’s the fallback of ‘writing down allowance’. This allows businesses to claim tax relief for items that don’t fall into the big two categories, but it will be spread over several years.
Future Forward
Capital allowances are tax relief. They also take away some (or all) of the financial risk for businesses that operate and innovate on the edge of pioneering thought and invention.
Generous allowances can be claimed against investment in research and development (R&D) and the costs of determining legal patents and intellectual property rights.
There are special reliefs for companies who take the risk of regenerating business premises within an approved list of disadvantaged areas of the UK.
The colossal costs associated with dredging and extracting essential minerals also have special allowances, as have greener vehicles. New and used zero-emission cars, vans and lorries qualify for the full 100% First Year Allowance.
You can’t claim for business entertainment, but you can claim for a yacht to entertain your clients on!
As we said, it’s complicated…
We’re here to help!
Capital allowances are often under-utilised by businesses and having the correct information and timely intervention could save your business thousands of pounds in tax.
Rackham’s Accountants has expertise in this field and can review the allowances that could apply to your business. Crucially, we can also advise regarding your future capital investment spending plans.
Speak to an expert and don’t lose out!
Book a free consultation with Rackham’s Accountants on 01482 631700 or use our contact form.
