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Everything you need to know about UK Capital Allowances

Updated: Jun 13, 2021

What are capital allowances?

There are many different expenses we can incur in our business on a daily basis. These can be categorised as either trading expenses of capital expenditure. Conventionally, if an item which has been purchased has a lasting benefit for the business over time (usually longer than a year) then it is likely to be classed as capital expenditure.

Capital allowances act as a way of achieving a tax relief against certain types of capital expenditure. These instances of capital expenditure will obviously reduce your profit, however, a capital allowance can help to reduce your tax burden for the year, therefore somewhat reducing the hit.

It is worth noting that in March 2021 a super-deduction capital allowance was announced in the budget, and is available only for companies. Therefore unincorporated businesses (such as self employed or partnerships) cannot take advantage of this update.

What is the new allowances?

The super deduction will give businesses a greater tax deduction for the purchase of capital expenditure. The allowances will be given along with the ongoing annual investment allowance (AIA) of £1million and will apply to capital investments from 1st April 2021 and 31st March 2023. Relief for the super deduction will be given at 130% on the qualifying cost compared to the usual 18% writing down allowance. For Companies who can claim this new super deduction, it will be more beneficial than claiming the AIA for main pooled assets.

Does all expenditure qualify for capital allowances?

In short, no. There are certain types of assets which can be described as allowable for capital allowances. Generally, you must own the asset in which the capital allowances will be claimed. This means that any items which you have hired or leased, the capital allowances are unlikely to be able to be claimed.

Anything which has been hired or leased is treated as belonging to the person using it. However, the true ownership of these items does not pass until the final payment on the lease at the end of the contract term.

How do I claim capital allowances?

Capital allowances are claimed in your Self Assessment tax return. These allowances must be claimed for within 12 months after the 31 January filing deadline. It is always worth discussing what allowances you can take with a qualified accountant.

How to find out what expenditure qualifies for Capital Allowances

There are many types of capital expenditure. However, the main one is plant and machinery. The most common instances of plant and machinery purchases are as follows:

  • Cars

  • Vans

  • Computers, printers etc

  • Tools

  • Machinery

There are some key items which definitely do not attract the benefit of capital allowances, such as the cost of buildings/property. However, there are some aspects of a building which may qualify for allowances, as these allowances can be obtained against integral features or fixtures.

Note: Capital allowances cannot be claimed on fixtures/features for a residential property. It must be a property used for business purposes. For example, an office, shop or factory.

What are Fixtures and Integral Features?

Fixtures are defined by the HMRC as items which can be removed from a building without too much difficulty. For example, shelving in your office.

Integral features on the other hand cannot be easily removed, such as air conditioning units or electrical systems or heating systems. These aspects are deemed to be integral parts of the building, but can still benefit from capital allowances.

Can you claim allowances on a car used privately and for business?

This is always a bit of a complicated topic. The topic of a car which is both used for work and privately is always a complexity in the world of tax accounting, as it can be incredibly difficult to exactly define the usage between private and work usage.

You can claim capital allowances on a car used privately and for business, however, you can only claim for the proportion of the usage for the business. Therefore, if you use the car 25% of the time privately, you must restrict the capital allowances you are claiming by that 25%. However, as previously mentioned, calculating the personal usage can be difficult, but should be accurate.

The capital allowances applied to cars are somewhat more complex than other assets as well. The government likes to use capital allowances as a method of encouraging the use of more environmentally friendly cars, and therefore you get different rates depending on the carbon emissions of your vehicle. Any new or used cars with zero emissions will actually attract a 100% allowances. Then beyond that, the allowance reduces. For anything below 50g/km you can claim 18%, and anything else will be placed in the 6% rate pool. This should therefore be considered when buying a new vehicle for the business, and is a core reason why we have seen a significant growth in the usage of electric vans in the UK in recent years. If your business heavily uses vehicles, then it can be a wise decision (not just from a tax perspective either) to utilise the benefits of electric or low emission vehicles.

Capital Allowance Rates

The written down allowances can be split into 18%, 6% or 100%. These are split into your normal allowance of 18%, a ‘special pool’ written down allowance of 6%. The 100% comes into play for the annual investment allowance.

What is an Annual Investment Allowance (AIA)?

The annual investment allowance (or AIA) provides the business with 100% tax relief on assets which qualify as plant and machinery. This relief is subject to an annual maximum, and cannot include cars in the allowance. You also cannot claim AIA on items which you have used for personal reasons prior to using them within the business. For example, let’s say you owned a great computing setup and decided to bring it to work to use in the business, this would receive no relief. If something cannot fit into the AIA ‘pool’ it most likely will fit into either the normal allowance pool or special pool.

The maximum amount from 1 Jan 2022 to claim expenditure on is £200,000 - However, until then it is £1,000,000

What is a Written down Allowance?

The written down allowance is the method of giving tax relief on a portion of the value of an asset. For example, as a simple example:

  • John has an asset value of £24,000

  • His written down allowance is in the 18% bracket

  • Therefore, his allowance is: £4,320

  • His written down value brought forward is therefore £19,680

  • John can therefore deduct the £4,320 from profits for the purposes of tax

More Capital Allowance Information

The information available on capital allowances can change on an annual basis, and it is always wise to keep up to date on the HMRC and GOV.UK websites. However, the best way to stay on top of your taxes and make sure you are claiming the optimum level of relief on your taxes is to hire a professional and qualified accountant to prepare your annual taxes for you.

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