How to Reduce Taxable Income with Capital Allowances

You might be aware of capital allowances and may have even claimed capital allowances in the last tax year, but do you know exactly how much of your business assets you can claim?

The rules surrounding capital allowances are vague and complex therefore difficult to maximise the number of tax deductions available.

1. What Are Capital Allowances?

Tax relief isn’t always easy to come by but capital allowances are an easy way for businesses to obtain it. Essentially, a business can use capital expenditure to reduce their taxable profit.

All UK taxpayers with a business can take advantage. They are entitled to capital allowances on certain assets they use in their day to day business.

You can claim certain property embedded fixtures & fittings as long as what your business does continues to qualify.

The good news is that if you do qualify, you can deduct some or all of the cost of each item before you pay tax.

2. What Can You Claim?

Many of the laws on capital allowances are vague. Terms like ‘plant and machinery’ are not well-defined and some businesses try to claim items they can’t, or miss items that they can.

For instance, items that cannot be claimed include land or land related expenditure as such, bridges, docks, roads and other landscape related items, but there are often exceptions. For example, if an access road is constructed purely for the purpose of installing plant and machinery.

Many aspects of your commercial building could also qualify however it’s often tricky to calculate the itemised costs of the qualifying embedded fixtures & fittings. Functionality is also a key factor when determining whether embedded items of fixtures & fittings qualify. Due to the level of Capital Allowances available in this area combined with the challenges required to maximise tax relief, it’s adviseable to engage an expert.

In the Office

Your office is full of things you can claim if you own the office. If you rent the office, disregard this advice unless you have paid for the items.

Parts of your office like the fixtures, fitted kitchens, CCTV systems and toilets can all be claimed. You can even claim for shelving, if you have any.

Integral parts of a business office are included as well. This means you can deduct the cost of fixtures such as lifts, lighting and electrical wiring.

More items that you can claim are cold water systems and other kinds of heating systems and ventilation.

In Construction

Demolition costs usually fall under the heading of capital allowances. If you need to demolish a building to build a new office for your business, make sure to keep track of every expense related to this as allowances may be claimable.

Structural Buildings Allowances (SBA) is certainly a subject to consider in this scenario.

Plant and Machinery

In order to claim allowances it is necessary to identify the purpose of the plant and machinery, for example what is the items function in the business?

Often, alterations to your building can also be included. This includes the cost for installation and construction of any qualifying plant and machinery.

Energy Technology is Deductible Until April 2020

The government wants you to treat the environment well and for this reason, they created the Enhanced Capital Allowance scheme. The government introduced this particular legislation in 2001.

You’re able to write off the entire cost of the equipment against your profits within the first year of purchase. Another reason this tax law might be beneficial: energy efficient technology isn’t always cheap. This helps offsets the cost of buying energy-efficient equipment.

It allows you to write off the entire cost of any product on the Energy Technology list. The aim is to encourage businesses to adopt technology like low CO2 cars, natural gas, water conservation machinery and hydrogen refuelling technology.

However, it is important to note that the budget in October 2018 introduced measures to end the 100% first year allowance for Enhanced Capital Allowances in April 2020.

A Few Extra Things

There are a few things you may not realise fall under plant and machinery. Things like storage tanks, thermal and sound installation and temporary storage silos fall under plant machinery as well.

How to Reduce Taxable Income Through Capital Allowances

If you’re wondering how to reduce taxable income, you can often claim 100% of the cost in the year you bought the item. This falls under the umbrella of Annual Investment Allowance or AIA. The limit for AIA up to 31st December 2018 was £200,000 and from 1st January 2019 is now £1,000,000.

Annual Investment Allowance (AIA) is normally only claimable in the financial year that the expenditure was made, so make sure you claim within that year or you will only be able to claim to the tune of 8-18%

If you’ve spent capital buying or improving your commercial property, estimate your claim here.