When you purchase assets for your business, you can lower your tax burden by claiming capital allowances. These might be business vehicles, computers, machinery, or software development.

Capital allowances are an essential aspect of corporate tax regulations because of the tax savings potential, thus it’s an area that business owners may profit from. However, capital allowances are quite complicated, therefore this essay seeks to provide some guidance.

What are capital allowances?

Capital allowances are a sort of tax relief available to firms that invest in long-term assets. These are assets that you may fairly expect to be used by the firm for more than 12 months and are sometimes referred to as fixed assets (or capital assets!).

When you claim capital allowances, you can deduct a portion or all of the asset’s value from your earnings. Businesses pay tax on their earnings, therefore decreasing the amount of profit means paying less tax.

There are several sorts of capital allowances, each with its own set of conditions. In certain situations, claiming them allows a company to deduct the whole cost of purchasing an asset in one year, resulting in a large reduction in its tax payment.

In other cases, they function similarly to depreciation, and the company can deduct a portion of the asset’s value from its corporation tax payment.

Why it’s useful to claim capital allowances

The most obvious benefit of claiming capital allowances is that it lowers your tax burden. In certain circumstances, this can be rather substantial.

There may be situations when you cannot utilise your entire limit towards your tax obligation. If you have any remaining allowance, it generates a ‘loss,’ which you may then carry forward to the following year to decrease that year’s cost.

Can I claim capital allowances on anything?

Capital allowances are not available for everything you buy for your firm. Again, it’s a complicated issue, but capital allowances serve two purposes:

• Allow businesses to avoid the cost of wear and tear on their capital assets.
• Encourage investment in assets that will increase productivity.

In brief, capital allowances may only be claimed on assets that you maintain and utilise in your firm. This implies that in order to claim capital allowances on an asset, you must have purchased it. Leased products do not qualify.

Other exemptions exist, such as assets used solely for corporate entertainment (HMRC uses the examples of a boat and a karaoke machine!).

Capital allowances are not available for land, constructions such as bridges and roads, or buildings (including doors, gates, and so on).

Capital allowances are normally available for the following items:

• Cars
• Vans
• Trucks
• Machinery
• Computers
• Software
• Office equipment (desks, filing cabinets, photocopiers)
• Fixtures and fittings (kitchens, decorating, shelving)
• The cost of altering a building to make it suitable for another asset

Are capital allowances the same as claiming expenses?

Although the concepts are similar, capital allowances and allowed costs operate differently. Capital allowances are only available on long-term assets, which are purchases that are expected to endure longer than a year.

Expenses are goods that you expect to last less than a year. You can still deduct them from your profits to minimise the amount of tax you pay, but you won’t be able to do so over time.

An excellent illustration of how this works is if you purchase a vehicle for your company. You may fairly anticipate the vehicle to endure more than a year, therefore you can deduct capital expenditures for it.

The insurance that you buy to drive the van is valid for a 12-month period, so you record this in your accounts as an expense.

Working out an asset’s value for capital allowances

The basis of capital allowances starts with the value of the asset itself, but that isn’t always a straightforward figure. For instance, a car’s value for tax purposes is what the business paid for it, plus any extras.

The value of an asset isn’t restricted to just the cost of the asset itself though. A good illustration of this would be where a company buys a new lathe. The lathe itself costs £300,000, but that still isn’t the end of the story.

There are also delivery costs, it needs programming, and the business must make alterations to the building so they can accommodate the new machine.

All these charges can be applied to the asset’s base cost for calculating its tax value. In other words, all expenditures incurred by the company in preparing the asset for use.

What about ongoing costs for the asset?

If you have service fees, you will report them as expenses in your profit and loss statement. However, if you have work done on the equipment to make it more efficient or to extend its life, you may add this to the asset value.

Cars and capital allowances – what counts, and what doesn’t?

Cars are an exception to the rules around capital allowances and are treated differently. A good place to start is with how HMRC define a car for capital allowances.

It counts as a car if…

• It’s suitable for private use – this includes motorhomes
• Most people use it privately
• It wasn’t built for transporting goods

It doesn’t count as a car if it is…

• A motorcycle bought 6th April 2009 or later
• A lorry, van, or truck

There are also ‘crossover’ vehicles that may look like a car, but are classed as commercial vehicles so again, be careful before you buy.

But why is it important? Well, it affects what kind of capital allowance you can claim.

If it does count as a car, you can claim either:

• The car’s full value as a first-year allowance
• 18% of the car’s value, using main rate allowances
• 6% of the car’s value, using special rate allowances

Unless the automobile is entirely electric, buying a car is seldom tax effective. We highly advise you to consult with your accountant before making any decisions!

This is since the capital allowance treatment of automobiles is dependent on their environmental effect. You may, for example, deduct the whole cost of your zero-emission vehicles and charging stations since they qualify for the yearly investment allowance.

Higher-emission vehicles will go into the special rate pool, which means you may only deduct 6% of their value from your tax payment. There is a significant difference!

What happens if I get rid of an asset?

A ‘disposal’ occurs when an asset departs your firm. This may be because you sell it, but it could also be because you scrap it or give it away.

When you sell an item, you must calculate the difference between its write down value (the asset’s worth after accounting for depreciation) and the price you paid for it. We go into this in further detail in our blog post about the various forms of capital allowance!

• If you dispose of an asset, and the written down value is more than the price you got for it, you’ll have a further loss. You can offset this against your Corporation Tax.
• But if you sell an asset for more than its written down allowance, you may need to pay more tax.

It’s why it’s a good idea to think carefully about which allowance to claim, because this affects how much you claim – especially on an asset you will sell for a high value.

What if I don’t use the full amount of capital allowance?

The good news is that if you acquire assets but don’t utilise all of your allowances in one year, you may roll the unused allowance over to the next year.

This appears on your financial sheet as a ‘tax asset.’ If you generate a profit in later years, you can deduct it from the carryover allowance.

For example, if you buy a vehicle for £100,000 but your tax payment is just £5,000 that year, you can carry the extra forward.

How to claim capital allowances

Despite its complexity, claiming capital allowances is actually rather straightforward. When you fill out your tax return, simply check the box to indicate you’re claiming capital allowances, and you’ll be sent to the capital allowances pages.

You must have a separate document demonstrating how you arrived at your statistics, which you may attach to your application.

Remember, as the taxpayer, it is your obligation to do this right — double-check your numbers before submitting! (Alternatively, have an accountant do it for you.)

Capital allowances are a minefield

If you have made it this far then well done! As you can see, we weren’t kidding when we said that capital allowances are one of the most complex areas of UK tax.

It’s always good to ask an expert to look over your capital allowances calculations, but it’s even better to call them before you make a purchase. They can give you a clear strategy to help you make the best use of all your allowances.