Capital Allowance Claims: Your Straightforward Guide to Plant and Machinery
Businesses are encouraged to work with proactive advisors to ensure the most efficient route is taken to deduct a lot from taxes even when profits increase.
If you’re not familiar with the expenditure that qualifies for capital allowances, here is a basic overview of what you need to know.
Understanding The Qualifications
When you’re trying to claim capital allowances for owning a commercial premise, you need to follow strict guidelines. The main type of capital allowances that businesses try to qualify for is for plant and machinery. If you want to claim this allowance, you’re going to have to justify the activities that your company performs and show that you incur qualifying expenditures.
The term “qualifying activity” is going to encompass all kinds of taxable activities that are not a passive investment. Capital allowances can be claimed by Sole Traders, Partnership and Companies that carry out a qualifying
If you’re wondering whether your spending is classified as a “qualifying expenditure”, it will normally be depended on your trade. The property embedded fixtures & fittings that you’ve paid/paying for, should be used within your business.
Computers, office furniture, tools, and any machinery qualify for this allowance. The embedded fixtures & fittings within commercial property can also qualify and often equate to the largest reduction in tax liabilities.
Getting To Know Asset Pools
There are three main pools when you’re measuring your capital expenditures on plant and machinery.
Consider the cost of the items and how much it costs to improve or to install them. Which asset pool the expenditure falls into will depend on a number of factors, such as the nature of the item, the expected life of the asset, or sometimes it will purely depend on legislation.
By definition items which are generally classed as plant and machinery will go into ‘General Pool’. Items which fall into ‘Special Rate Pool’ may be items that are an integral part of your buildings, such as heating and lighting.
By definition, items which are generally classed as plant and machinery will go into ‘General Pool’. Items which fall into ‘Special Rate Pool’ may be items that are an integral part of your buildings, such as heating and lighting.
There are two types of ‘single asset pool’. The first type is for certain vehicles, such as expensive cars and the second type is more commonly known as a ‘short life asset pool’ which is used to claim allowances on assets considered to have a short life before being scrapped or replaced.
Understanding First-Year Allowances
One of the allowances that you need to understand if you want to maximise the speed in which you realise the tax relief is first-year allowance(FYA). FYAs are a special type of allowance because you can get a 100% deduction against the profits incurred in the year.
However, note that these allowances are constantly subject to review and frequent changes in legislation. For example, the Enhanced Capital Allowances (ECA) scheme for energy and water-efficient plant and machinery will end in April 2020.
All About Writing Down Allowance’s (WDAs)
WDA’s provide you with tax relief over the course of several years. While you don’t get immediate tax relief for your capital expenditures, you get relief during the future years of your business.
Allowances are initially calculated on the cost/initial value of the assets in a given financial period.
If the assets are in the General Pool (also often called the main asset pool), the allowances will be claimed annually at 18%. If they are in the Special Rate Pool, the current rate is 8% (to be reduced to 6% from 1st April 2019). Assets in a single asset pool will be written down at 8% or 18% depending on the item and finally, items in a short life asset pool will be written off over a term not longer than 8 years following the year in which the asset was acquired.
Allowance Claims Should be Double Checked
Before submitting your tax returns, consider if you are claiming all the allowances that you are entitled to. For example, have you purchased a new building during the year and considered any capital allowances that may be claimable on integral features in the building? Annual Investment Allowance (AIA) is an important and lucrative first-year allowance but it is only available on expenditure in the year that the expenditure is made.
To learn more about reducing your taxable income, check out our guide to deducting allowances.