The rules governing the capital allowance regime are a hotchpotch of legislation and case law. It is up to the dear taxpayers to understand, interpret and apply. Alternatively, and obviously recommended by us, you ask a professional adviser to help analyse your position. One vital factor will be to ensure you use the relevant capital allowance rates to calculate the value of tax relief to be submitted as part of the tax return.
As with many areas of tax law, the legislation has seen a number of changes over the years. Regardless of the size of carrot being offered to businesses to reinvest cash back into the business, which waxes and wanes over the years, the amount of legislation only increases. The result is a web of rules that businesses struggle to cut through, resulting in many missed opportunities for relief.
In summary, the potential for relief is generally much broader than companies claim for, or indeed are aware of.
For example, figures as to the amount of property owners claiming allowances vary, but it is suggested that less than 10% of commercial property owners currently claim the capital allowances they are entitled to. This is a waste.
Our own experiences certainly back up these findings. As a firm, we find capital allowances relating to property projects remain overlooked and unclaimed. For instance, where a sale or purchase is being contemplated; capital allowances may be of value to a future owner of the asset, which can be reflected in sale negotiations and price.
Calculating your claim for capital allowances
Capital allowances are available to a range of UK taxpayers, from property companies and limited businesses, through to partnerships, overseas investors, private individuals and the self-employed.
As you will be aware, most capital assets depreciate in value over time. For accounting purposes, this will be adjusted for by way of ‘depreciation’ expense in the P&L. Any depreciation accounted for must be added back when one is looking to calculate the profits that will be subject to corporation tax. However, this is where capital allowances ride to the rescue. Essentially, capital allowances are the tax equivalent of depreciation. They are just calculated in a different manner.
As such, you are able to claim capital allowances against the value of assets you have purchased. Put simply, a percentage of the cost of the asset will be allowed as a deduction in the tax computation. That percentage will depend on the type of asset and the current position of the business. In some cases, where the asset is within the Annual Investment Allowance (see below) the full value of an asset will be written off in the year it is acquired. Where the capital allowance rate is less, eg the basic Writing Down Allowance of 18%, then the value of the asset is written off for tax purposes over several years.
If however you use the cash basis for calculating your trading profit, items such as machinery, computers and vans will be deducted as an expense. Cars however may still come under capital allowances.
You are only permitted to claim against assets that you own (leasing and hires do not generally come within capital allowances regime, look instead at expenses) and for certain classes of capital expenditure – which is where the rules start to become challenging.
There is no exhaustive list of assets which can be claimed against.
Top-level guidance is provided which you must interpret and use to identify which capital expenditure is eligible.
Perhaps the most widely known applicable assets are fixtures and fittings. But there is considerable eligibility beyond this familiar area: moveable items like furniture, as well as what’s known as ‘integral features’ – e.g. air conditioning and emergency lighting are also eligible.
Once you have identified the eligible items, you will need to look at which of the different types of capital allowance that are available will apply. There are a number of different types of capital allowances and, you’ve guessed it, all have their own rates and rules.
The main types of capital allowance are:
- Annual investment allowance (AIA)
- Writing down allowance (WDA)
- Small pools allowance
- First-year allowance (FYA)
- Balancing allowance
If you have identified assets eligible for capital allowance relief, the next step is to ascertain the type of claim you can make and prevailing capital allowances rates in order to write off the cost of the asset against your taxable profits.
What are the capital allowance rates?
It is crucial that you identify and apply the correct capital allowance rates to each relevant, eligible transaction. Get it right to avoid any prospect of HMRC scrutiny.
The capital allowance rates (as at November 2017) for each of the types of allowance are:
- Annual investment allowance (“AIA”): 100% Claim for eligible assets up to an annual value cap of £200,000.
- First year allowance (“FYA”): 100%
- Writing down allowance (“WDA”):
- main pool e.g. plant and machinery – 18%
- special rate pool – 8%
- single asset pools – 18% or 8%
- Small pool write-off: 100%
- Enhanced capital allowances: 100%
In basic terms, you would claim for the purchase in the year you made the transaction to take advantage of the Annual Investment Allowance (AIA), or First Year Allowance (FYA), at 100%. The AIA has an annual limit – currently £200,000. If you are claiming after the year of purchase, you would use Writing Down Allowances (WDAs). Further details on each of the different types of capital allowance can be found here.
You submit your claim to HMRC in your tax return for the relevant tax period. Successful claims will see allowances applied as a deduction in your trading profits, delivering cash flow benefit.
On a practical point, it may be the case that tax relief could be clawed back when the asset claimed for is subsequently sold. In such instances, it may be possible with prior tax advice to avoid potential claw back on certain asset classes, subject to specific requirements and time limitations.
Enterprise Tax can help if you have a question about capital allowance rates
As the primary capital relief regime for UK companies, it makes financial sense to take steps to claim for the full extent of your company’s eligibility.
This is easier said than done, however.
With the burden on companies to apply what are a complex set of rules, and calculating using the correct capital allowance rates, is no mean feat – often resulting in companies not claiming their full eligibility.
Areas such as property projects for example remain largely untapped by businesses – especially where they are contemplating a sale or purchase.
Enterprise Tax can advise you on all aspects of capital allowances, relating to eligibility of assets, calculating the claim and submitting the claim to HMRC.
We can help by reviewing your purchases and assets against periods of account. We will identify and categorise the full extent of qualifying expenditure and support you in compiling the relevant evidentiary documentation and submitting your claim to HMRC.
Our services include:
If you have a question relating to capital allowances, please contact one of our chartered tax advisers.