What are Capital Allowances?
First, let’s cover the basics: what is a capital allowance?
A capital allowance is the amount of expenditure which a British business can claim against their taxable profits under the Capital Allowances Act of 2001, regulated by Her Majesty’s Revenue and Customs.
Think of it this way.
You incur expenses as part of doing business. These can be trading/revenue expenses or capital expenditure. If an item has a long-lasting tangible benefit for your business it’s usually considered capital expenditure.
Capital allowances allow you some tax relief for many items of capital expenditure, treating them as another business expense that reduces your taxable profit.
Types of Capital Allowance
There are three commonly used types of capital allowance:
- Annual Investment Allowance (AIA)
- Writing Down Allowance
- First Year Allowance / Enhanced Captial Allowances (ECA)
AIA allows businesses to deduct the full value of an item used for business purposes. Your business would then claim a tax deduction the same year that the item is acquired.
By comparison, a writing down allowance allows a business to deduct a percentage of the value of an item.
Finally, a First Year Allowance, or Enhanced Capital Allowance, allows deductions above the standard AIA amount for certain assets.
Can All Capital Expenditure Qualify for Capital Allowances?
Now, for the sake of clarity: not all capital expenditure qualifies for capital allowances.
To qualify, the expenditure must relate to certain tangible fixed assets. You also need to own the asset for which you’re claiming a deduction. If you own a property personally that’s occupied by a business, a claim is likely to be available.
Common examples of qualifying assets include plant and machinery items such as:
- Specialist equipment
However, this may also include property items like:
- Heating systems*
- Electrical systems*
- Fixtures & Fittings*
- Sanitary Ware*
*Depending on circumstances and Capital Allowance legislation applicable at the date of spend, some or all could qualify. It’s also important to note that Enhanced Capital Allowances (ECA’s) could also be available on certain items.
As such, it’s important you use experts with qualified knowledge of property, legislation and tax. This ensures items are not claimed that shouldn’t and, claims are maximised against your capital expenditure.
Claiming Your Capital Allowance
So, with all of that in mind, how do you go about claiming your capital allowance?
It starts with being thorough.
Begin by completing a thorough inventory of your business assets. Leave no stone unturned–you don’t want to miss out on an extra tax benefit.
As you complete your inventory, write down all of your assets.
From there, this will make it easy to narrow your list down to the assets that are relevant as capital expenditures, and which capital expenditures qualify as capital allowances.
You do not have sufficient detail to complete the required inventory?
You are not confident which items qualify and which do not?
Our process includes a detailed survey of your assets creating a full and robust inventory.
We have a complete understanding of property and Capital Allowance legislation. This ensures claims are both accurate and maximised.
Capital Allowance Review Service takes the risk away from you and your advisors.
Write Down Allowances
As we noted earlier, qualifying business assets are grouped into three categories: Annual Investment Allowance (AIA), writing down allowance, and First Year Allowance / Enhanced Capital Allowances (ECA).
If your tax returns are still open for amendment, this can still be considered depending on the year expenditure took place (often previous two years).
From there, you need to figure out whether assets fall under AIA or writing down allowances.
In general, you want to use AIA where you can. AIA allows you to deduct the full value of the asset up to the AIA limit whereas writing down allowances only deduct a percentage of the asset value. You should use writing down allowances if:
- you’ve already claimed AIA on items worth more than the total allowed AIA amount
- the item doesn’t qualify for Enhanced Capital Allowance (ECA).
Helping You Figure Out Your Allowances
Think you understand capital allowances? Ready to figure out yours?
We’re here to help.
We prepare your property capital allowances tax claim using a successful combination of legal and taxation knowledge with plant and machinery valuations and accounting skills.
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Our expert team are here to help answer any of your capital allowances questions or enquires you have about your commercial property.