Understanding capital allowances
If you run your own business, making the most of your capital allowances can help you minimise your tax bill. Businesses can use this kind of tax relief to deduct some or all of the value of an item from their profits before tax.
You can claim capital allowances on a range of items or assets that benefit your business long-term — also known as capital expenditure.
In this article, we will explain how the system works and which items qualify for the different types of capital allowance.
Types of capital allowances
Annual investment allowance
The annual investment allowance (AIA) allows businesses to claim 100% tax relief on the cost of most plant and machinery items up to a total of £1 million a year.
While business cars are technically classed as plant and machinery, they do not qualify for AIA. You also cannot claim this allowance on anything you received as a gift or items you used for other purposes prior to using them in the business.
The AIA amount has changed several times in the last few years. If this happens in the same period you’re claiming for, you must adjust your claim accordingly.
This can make calculations more complicated, but working with business tax experts can help you avoid errors.
100% first-year allowances
Businesses can use 100% first-year allowances to deduct the full value of qualifying assets from their profits before tax.
One such allowance is the enhanced capital allowance. This rewards businesses for investing in equipment such as:
- electric cars
- plant and machinery for gas refuelling stations
- gas, biogas and hydrogen refuelling equipment
- zero-emission good vehicles.
Super deduction and full expensing
During his Spring Budget, Jeremy Hunt announced that the temporary super-deduction scheme will end in April.
The super-deduction allowed companies to claim back 130% of the cost of new and unused plant and machinery bought between 1 April 2021 to 31 March 2023.
A new full expensing scheme will replace this scheme from 1 April 2023. It will work in the same way as the super-deduction but is limited to only 100% of the cost of these assets.
Writing down allowances
You can claim writing down allowances to deduct a percentage of the value of certain items for your annual profits.
This may be beneficial if certain items do not qualify for AIA or if you have already exceeded the annual threshold.
How different items are treated
Not all your capital expenditure will qualify for capital allowances. Most items that qualify for capital allowances are classed as “plant and machinery”. This can include:
- vehicles such as cars and vans
- computer hardware
- tools such as lawnmowers and saws
- specialist machinery
A more detailed overview of what counts as plant and machinery is available on the Government website.
Businesses can also claim specific capital allowances for expenditure such as structures and buildings or intellectual property about industrial techniques.
However, you cannot claim items you hire or lease or items used exclusively for business entertainment purposes
Business cars are often treated differently when it comes to capital allowances.
As mentioned, you cannot claim AIA for cars, but the enhanced capital allowance does provide tax incentives for businesses that invest in eco-friendly vehicles.
Meanwhile, businesses that use cash basis accounting cannot claim capital allowances on anything except for cars.
If you use your business car for private purposes, you can only claim capital allowances for the proportion of business use of the car.
For example, you may purchase a car for your limited company for £5,000 and use it for private purposes 20% of the time. In this instance, you can only claim for 80% of the company car’s cost — £4,000 in total.
How to claim capital allowances
You will need to claim capital allowances differently depending on your business structure.
Sole traders can claim the relief in their annual self-assessment returns, while partnerships can do so on their partnership tax returns. Limited companies need to include a separate capital allowances calculation in their company tax return.
Get in touch to find out how we can help you reduce your bill by making the most of your capital allowances.