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A commonly asked question among UK businesses. Under the capital allowances regime, capital expenditure by companies on qualifying items can be claimed and offset against taxable profits.
If you were to ask ‘what are capital allowances used for?’, they essentially provide a way for the government to incentivise investment by businesses.
In order to take advantage of tax relief on the cost of certain types of capital assets, businesses need to understand the rules, and if and how they can make a claim.
But with different qualifying items treated differently, confusion often arises for taxpayers when identifying the full extent of assets eligible for capital allowance tax relief, and applying the relevant rate of relief.
Capital allowance rules derive from a combination of legislation and case law, which are interpreted and applied by taxpayers, and then checked by HMRC.
Capital allowances are available to the following UK taxpayers:
The expenditure being claimed for must be against a particular type of asset.
You must also, generally speaking, own the asset on which you want to claim capital allowances – i.e. it’s not hired or leased.
Rather unhelpfully for businesses, there is no single definitive, exhaustive list of qualifying expenditure.
It requires an in-depth understanding of both legislation and case law to identify the full extent of expenditure that qualifies for capital allowance. There are however a number of general headings which the expenditure must fall within:
Plant and machinery is by far the most used of the categories, but still the ‘plant’ element continues to cause great confusion – largely because it is dictated by the specific trade of each business.
Integral features could include:
You can also claim for fixtures, e.g.:
Companies often do not appreciate the extent to which they can claim plant and machinery allowances for fixtures and equipment, for example in a commercial building they are buying, or when starting up a new business.
Conversely, there are plant and machinery you cannot claim capital allowances on:
The calculations needed to arrive at the correct capital allowance figures are the responsibility of the taxpayer – which can be overwhelming. As with anything HMRC, there is no room for error if you want to avoid scrutiny.
Capital allowances are calculated on the basis of relevant rates of relief on the cost of qualifying expenditure applied to taxable profits.
The main types of allowance include:
You make a claim yourself in your tax return, usually 12 months after the 31 January filing deadline for the return. However, providing you still own the property and the fixtures in the tax year you submit a claim, there is no time limit to make a capital allowances claim.
Claiming in the year you made the purchase should allow you to take advantage of Annual Investment Allowance, at 100%, up to the £200,000 annual limit, or under the First Year Allowance. Claiming after the year of purchase defaults to Writing Down Allowances.
Cars are treated under different rates within the capital allowances regime. The rates for 2017-18 are as follows:
|First Year Allowance for electric cars or if CO2 emissions are 75g/km or lower||100%|
|First Year Allowance for electric cars or if CO2 emissions are 95g/km or lower||100%|
|First Year Allowance for electric cars or if CO2 emissions are 110g/km or lower||100%|
|Writing Down Allowance if CO2 emissions exceed 75g/km but do not exceed 130g/km||18%|
|Writing Down Allowance if CO2 emissions exceed 95g/km but do not exceed 130g/km||18%|
|Writing Down Allowance if CO2 emissions exceed 110g/km but do not exceed 160g/km||18%|
|Writing Down Allowance if CO2 emissions exceed 130g/km||8%|
|Writing Down Allowance 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.
As specialists in tax, we can also advise on the many tax incentives that may be available to your business, including capital allowances, in the wider context of meeting your commercial goals.
The capital allowances regime comprises a substantial body of rules which are liable to frequent change in relation to qualifying expenditure, relevant rates for claim and threshold levels.
We can advise on the tax implications of different methods of acquiring assets, for example outright purchase or leasing, and on the best timing of your purchase or disposal.
We can also help where allowances have been missed in previous years, for example to when the business started or when a commercial property was purchased for the business.
Our services include:
For more information, get in touch with one of our specialist tax advisers.