Most day to day business expenses can be deducted from business income when calculating your taxable profits. However the rules are different for ‘capital’ expenditure.
‘Capital allowances’ is the term used to describe the allowances which allow businesses to secure tax relief for certain capital expenditure. Most ‘capital’ items, such as computer equipment, vehicles, machinery etc last for more than a year or so. The tax rules do not allow you to automatically deduct the full cost of such items in one go. And different rules apply to different types of capital expenditure. In some cases no tax relief is available at all even though you may have spent the money solely for business purposes.
This guide provides an overview of the main types of capital allowances that can be claimed and is aimed at businesses with relatively straight forward tax affairs.
Capital allowances are available in respect of:
Your entitlement to claim capital allowances is usually unaffected by how you pay for the items in question. For example, if you buy an item on hire purchase you can claim capital allowances based on the full normal cost of the item. The interest you pay and other charges are not part of the capital cost of the item but can usually be counted as deductible business expenses.
If you simply rent capital equipment, and do not secure ownership of the items, no capital allowances can be claimed. Instead the payments due, under what is usually called an ‘operating lease’, are simply deductible as a normal business expense.
Plant & Machinery
Some of the rules related to P&M depend on the nature of the expenditure and how much money has been spent on P&M during the accounting period. There are also special rules to provide tax relief for items of P&M you used privately before using them in your business and items that you only partly use for business purposes.
Annual Investment Allowance (AIA)
Most businesses had an AIA of £50,000 for P&M purchased during the 2008-09 and 2009-10 tax years. This limit was increased to £100,000 during the 2010-11 tax year and subsequently reduced in April 2012 to £25,000. The AIA increased from £25,000 to £250,000 for a two year period with effect from 1 January 2013.
This limit doubled to £500,000 from 6 April 2014 (for unincorporated businesses and 1 April 2014 for companies) until 31 December 2015. The limit is due to revert to £25,000 from 1 January 2016 unless further changes are announced.
There are transitional rules for businesses whose accounting periods span the operative date of the changes.
Writing Down Allowances
Examples of plant and machinery that typically qualify for the 100% FYA include:
Cars that have an element of non-business use, by the self-employed, must be allocated to a single asset pool to enable the private use adjustment to be made.
Cars purchased before 1 April 2009 (Corporation Tax) and 6 April 2009 (Income Tax) continue to be treated under the old rules for a transitional period of five years. This means that cars with no non-business use costing:
If the life of the asset is ‘short’, businesses can choose to calculate the capital allowances outside the main pool. This will generally mean more tax relief but only when the assets are written off, scrapped or sold.
The tax allowance here is set at 8% of the written down value each year with all expenditure on long life assets being added to a special 8% rate pool.
Integral features of buildings and thermal insulation
Such features are:
Businesses can also claim the 8% allowance each year for expenditure on installing thermal insulation in all existing buildings used for any qualifying business purpose – other than if it’s a residential property business.
Research and Development
The rules as to what qualifies in this regard are complex. In general however, a project qualifies as R&D if:
Assets leased out
Where a business asset is used partly for private purposes the entitlement to capital allowances are restricted. The asset is not included in any pool but is the subject of a separate calculation.
The allowances are computed in the normal way so can in theory attract the 100% AIA or the relevant Writing Down Allowance.
However, only the business use proportion is allowed for tax purposes. Private use of assets by employees does not require any restriction of the capital allowances.
Claiming capital allowances
You do not need to claim the full amount of the available allowance. You might choose to limit your claims to capital allowances to avoid other allowances or reliefs being wasted.