When you purchase assets for your business, you can lower your tax burden by claiming capital allowances. These may include business automobiles, computers, machinery, or even 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 article aims 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?

Not everything you buy for your business is eligible for capital allowances. Again, it’s a confusing subject but capital allowances basically do two things:

• Give businesses relief from the cost of wear and tear on their capital assets
• Stimulate investment in assets that will provide a boost to 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.

A 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.

Because the insurance you purchase to drive the van is valid for a year, you record it as an expense in your records.

Working out an asset’s value for capital allowances

The value of the asset itself is the starting point for capital allowances, although this isn’t usually a clear amount. For example, the tax value of an automobile is what the company paid for it plus any extras.

However, the value of an asset is not limited to the cost of the asset itself. A excellent example would be a corporation purchasing a new lathe. The lathe alone costs £300,000, but that’s not the end of the story.

There are additional shipping fees, programming costs, and the firm must undertake architectural modifications to accommodate the new equipment.

All of these costs can be added to the base cost of the asset itself when working out its tax value. In other words, all the costs the business incurs when getting the asset ready to use.

What about ongoing costs for the asset?

If you have servicing costs, then you’ll include these in your profit and loss account as expenses. But if you have work done to make the machine more efficient, or to extend its life, then you can add this to the asset value.

Which capital allowances can I use?

So, now that we know the worth of our asset, what can we do? Capital allowances come in several forms, including the Annual Investment Allowance, the First Year Allowance, and the heroically titled super deduction.

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.

There are also ‘crossover’ vehicles that appear like cars but are classified as commercial vehicles, so be cautious before purchasing. But why is it significant? It impacts the type 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 due to the fact that the capital allowance treatment of automobiles is based on their environmental impact. 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 get this right – double-check your numbers before submitting! (Alternatively, have an accountant do it for you.)

Capital allowances are a minefield

Congratulations for making it this far! As you can see, we weren’t joking when we stated capital allowances are one of the most complicated aspects of UK taxation.

It’s always a good idea to have an expert review your capital allowances estimates, but it’s much better to call them before you buy. They can provide you a clear approach to assist you make the greatest use of all your allowances.