Taxes have long been a point of contention between businesses and the government. Luckily, your business can claim some tax relief if it operates using eligible assets.
Any item that offers your business a tangible benefit over a long period of time can usually be considered for a capital allowance. This means they can be treated as a business expense that reduces your taxable profit.
There are different types of capital allowances. Each comes with a set of rules that must be met before you can write off the cost of an asset against taxable profit.
Continue reading to find out the different types you can claim for tax relief.
What Is Considered Capital?
To be considered eligible capital, an asset must be owned and used for business. The asset must have a long-term projected use, usually longer than one year.
If you hired or leased an asset, you may not be able to claim capital allowances. However, you may be able to obtain relief on the asset as revenue expenditure.
Usually, capital items are plant and machinery. Research expenditure and building work can sometimes be considered to be capital.
Capital allowances cannot be claimed for costs of buildings or property. Parts of a building may sometimes be considered fixtures or integral features, but the building must be used for business purposes.
The types of assets that will usually qualify for capital allowances are as follows:
- Office equipment, such as computers or printers
- Cars and Vans
- Tools and equipment, such as saws
- Specialised equipment and machinery
What Are Integral Features?
Integral features are any components of a building that cannot be easily removed. These include, but are not limited to, electrical systems, ventilation systems, and heating systems.
What Are Fixtures?
These are components that can easily be removed, such as desks and other furniture.
Annual Investment Allowance
This allows you to claim 100% relief against the costs of capital that qualifies as plant and machinery. As of January 2016, the annual limit for this type of allowance is £200,000.
You may not claim an annual investment allowance on cars, but you can claim for work vans.
It is essential that this allowance is claimed in the financial period in which the assets are purchased. If the total cost of these assets exceeds the annual limit, they will qualify for a writing-down allowance.
You can claim a writing-down allowance if your total expenditure on capital exceeds the limits of annual investment allowance. This allows you to deduct a percentage of the cost of the qualifying assets from your annual profits.
The rate will depend on the type of asset. You will need to group your assets into pools based on their qualifying rate.
You can make a writing-down allowance claim for items that do not qualify for annual investment allowances, such as cars and items you owned before you used them in your business.
Cars are subject to specific regulations, as discussed below.
As stated above, you cannot make an annual investment allowance claim for a car. However, the British government is trying to encourage the use of environmentally friendly cars.
You may be able to make a writing-down allowance claim on a car.
Depending on the CO2 emissions of the car, it could qualify for 100% relief. Restrictions apply for cars with high CO2 emissions or cars that are used privately.
If a car is used privately and for business, you can only claim the portion used for business.
First Year Allowance
Like annual investment allowances, you can claim 100% of the cost of qualifying assets during the accounting period the purchase was made.
This applies to specific types of expenditures:
- Cars with CO2 emissions less than 75g/km
- Zero emissions vehicles
- Energy saving and water efficient machinery
- Plant and machinery intended for specific areas in certain enterprise zones
- Certain vehicle refuelling equipment
Exceptions include gifts, items used prior to business use, and items used as sole proprietorship prior to incorporation.
Small Pools Allowance
After you have reached the limit for annual investment allowances, you can make a small pools allowance if the remaining balance is less than £1,000.
You can claim the whole amount rather than making a writing-down allowance claim.
What if I Sell an Asset?
If you sell an asset, you must deduct the proceeds from the balance of the pool. An annual investment allowance claim has likely already been claimed. This means the proceeds will be deducted from the writing-down allowance claim balance.
For example, you have a writing-down allowance balance of £8,500. You sell an asset for £2,000. You would deduct the £2,000 from the balance of £8,500, and the remaining £6,500 will carry over to the next accounting period.
If the proceeds exceed the remaining balance, you will need to add the excess amount to the year’s profits.
Other Considerations for Capital Allowance
If you own a business and have made expenditures on qualifying capital, you should consult with a professional to find out what types of allowances you can claim.
When you purchase an asset, it is best to make a capital allowance claim the year of purchase.
If you sell or discontinue use of the asset, you may need to make adjustments to your writing-down balance.
If you make a late claim, it may be subject to scrutiny. This is an issue that is open to legal discussion.
Getting Ahead on Taxes
Tax law can be complicated and confusing, especially for businesses. Luckily, you can consult with professionals who are dedicated to making sure you get the tax benefits you deserve.
Capital allowances are intended to give you relief when the time comes to pay taxes on your annual profit. The professionals at Capital Allowance Review Service are here to respond to any questions or concerns you may have.
You can get in touch with us today for your free consultation.