If you have identified assets eligible for capital allowance relief, the next step is to ascertain the type of claim you can make to write off the cost of the asset against your taxable profits.
There are however a number of different types of capital allowance available, each with their own rules around eligibility and amount that can be claimed.
The main types of capital allowance are:
- Annual investment allowance (AIA)
- Writing down allowance (WDA)
- Small pools allowance
- First-year allowance (FYA)
- Balancing allowance
Correctly categorising items will ensure you comply with HMRC regulations and maximise the amount of tax relief you can claim.
Annual Investment Allowance
The Annual Investment Allowance allows you to claim 100% relief against the cost of purchasing eligible plant and machinery up to the annual limit of £200,000.
AIA Annual Limit
From 1 January 2016: £200,000
AIA applies to both ‘general’ and ‘special rate’ equipment. Certain ‘green’ initiatives may also qualify for further substantial relief.
There are however a number of exceptions to AIA – most notably expenditure on cars.
To calculate the relief available to you, you should aggregate the cost of your relevant purchases from the same accounting period, if this is less than the current AIA annual limit (currently at £200,000), you will be able to claim 100%.
In the event you have expended more than the AIA annual limit, provided the expenditure meets the requisite criteria, you will be able to claim capital allowances relief as a writing down allowance (see below) under either the main rate or special rate pool (see capital allowance rates article).
If within a single accounting period your expenditure on qualifying capital exceeds the AIA annual limit, you may be able to claim writing down allowances.
Writing down allowances (WDA) allow you to deduct a percentage of the value of an item from your profits each year.
They are available when you deduct a percentage of the value of an item (usually what tou paid for it) from your profits each year.
The percentage you can claim under WDA will be determined by the item being claimed for. For example, cars are dealt with in relation to CO2 emissions.
To claim, you will need to group the relevant items into ‘pools’ based on the percentage rate they qualify for. When you know the rate for your items, work out how much you can claim and deduct it from your profits before tax on your tax return. The amount left in each pool becomes the starting balance for the next accounting period.
The rates for 2017/18 are:
1) The ‘main rate’ at 18%: plant and machinery.
2) The ‘special rate’ at 8%: integral parts of a building; long-life items; thermal insulation of buildings.
Writing down allowances are also used where AIA does not apply. The main area of application is with:
- Items already owned prior to business usage
Motor cars, 2015/16 to 2017/18
|FYA for electric cars or if CO2 emissions are 75g/km or lower||100%|
|FYA for electric cars or if CO2 emissions are 95g/km or lower||100%|
|FYA for electric cars or if CO2 emissions are 110g/km or lower||18%|
|WDA if CO2 emissions exceed 75g/km but do not exceed 130g/km||18%|
|WDA if CO2 emissions exceed 95g/km but do not exceed 130g/km||18%|
|WDA if CO2 emissions exceed 110g/km but do not exceed 160g/km||18%|
|WDA if CO2 emissions exceed 130g/km||8%|
|WDA if CO2 emissions exceed 160g/km||8%|
Emissions thresholds will be reduced to 50g/km and 110g/km for expenditure on or after 1 April 2018.
Small Pools Allowance
In some circumstances, it may be more beneficial to claim Small Pools Allowance instead of WDA.
If one of your pools totals less than £1,000 (or less before you work out the writing-down allowance) in value after you have used your Annual Investment Allowances at the end of a 12 month chargeable period, you may be able to claim that whole amount as a Small Pools Allowance instead of the 20% writing-down allowance.
First Year Allowance (FYA)
Similar to the AIA, First Year Allowances (FYA) enable you to claim the full 100% of the cost of eligible assets in the same accounting period. FYA do not count toward the annual AIA limit.
FYA apply to specific types of expenditure such as:
- New zero-emission goods vehicles
- New plant and machinery for use in designated areas within certain enterprise zones
- Certain new energy-saving and water efficient equipment
- New cars with carbon dioxide emissions of 75gms per km or less
- Specific new vehicle gas refuelling equipment
There are however restrictions to be aware of when seeking to claim FYA. The following items would not be eligible for FYA:
- Items gifted to you
- Items used prior to use in the business
- Items been used as a sole prop before incorporating and moving into the new business
If you don’t claim all the first year allowances you’re entitled to, you can claim part of the cost in the next accounting period using writing down allowances.
If you cease to use an asset within the business, it is likely you will need to make adjustments to any allowances you have claimed within that tax year, effective from the date you stopped using the item.
There are two types of adjustment to consider:
- Balancing allowance – where there is a loss on the asset, it would be allowed as a deduction from your taxable profit as a balancing allowance. To calculate, subtract the sale price (or market value) from the price paid, less the capital allowance claimed in the previous year.
- Balancing charge – Using the same calculation, if the disposal value is greater than the value of the pool brought forward then a balancing charge may be due.
Enterprise Tax Consultants can help with capital allowance queries
The rules surrounding the types of capital allowance are complex and subject to ongoing change in respect of rates and eligibility criteria. Find out more about: