Capital Assets For limited companies

If you have purchased or are about to purchase a capital asset, such as a computer, printer or office furniture for use in your limited company, you should be aware of the different tax treatment given to such purchases and account for them accordingly.

Any capital assets purchased should be just for business use and any personal use should be insignificant. If personal use is significant a Benefit in Kind charge will apply based on the value of the capital asset.

Here we consider how capital assets are taxed and how you should adjust your available funds to ensure that you can meet your tax commitments.

Capital allowances & tax relief

The tax relief incurred in purchasing a capital asset cannot be claimed using the normal expense claim procedure. They attract a different tax treatment in the Company Accounts known as Capital Allowances. These are briefly outlined below but discussed in more detail in the Company Tax section under Corporation Tax.

Generally, capital items are those items that will have enduring benefit to your limited company. Examples are computers, tools, office furniture and motor vehicles. If the items purchased are owned by the business, capital allowances will be claimed rather than the full cost being an allowable expense in the year of purchase.

130% “ Super-deduction “and 50% First Year Allowances

From  1 April 2021 and 31 March 2023, companies will be able to claim a 130% deduction for most new plant and machinery, ( i.e. computers, tools and office furniture, excluding cars). Under current rules, businesses can claim an ‘annual investment allowance’ which effectively gives a 100% deduction on expenditure up to a maximum of £1m per annum  and a writing down allowance of 18% p.a. on the excess. Whereas, this new relief allows a 130% deduction in the year of expenditure, without a maximum cap. 

Other capital expenditure currently qualifying for the annual investment allowance and a ‘special rate’ allowance of 6% p.a. thereafter, such as heating, electrical and air conditioning systems, will qualify for a first year allowance of 50%. 

There are exceptions though- for instance:

• This new super deduction cannot be claimed against the purchase of used or second hand assets.
• Or  for expenditure where contracts were entered into prior to 3 March 2021 (i.e. businesses cannot claim this new deduction if they had already committed to the expenditure prior to the Chancellor’s budget).
• This allowance will be available on assets acquired through hire purchase contracts, but there are additional considerations for assets acquired through other types of leases, therefore advice should be sought on these areas.
• The annual investment allowance  of 100% is still available on computer equipment etc  that doesn’t meet the super-deduction criteria, such as used or second hand acquired assets. 

The capital allowance rate for motor vehicles will be dependent on the CO2 emissions of the vehicle. For 2021/22,  cars with CO2 of 0 benefit from 100% capital allowances, vehicles with CO2 emissions between 1-50 are  entitled to annual capital allowances of 18% and emissions over 50 are entitled to annual capital allowances of 6%.

Transferring the capital asset

If you purchase a capital asset personally you should transfer the asset into the ownership of the limited company. This is achieved by writing a company cheque to yourself ensuring there is a full paper trail of the transaction. Write out a receipt for the payment made and submit it with your Company Accounts.

Receipt example:

I, Mr. Smith, hereby transfer a laptop computer
For the full value of £1,000 incl. VAT (if you are vat registered)
To A Smith Limited
On 31 March 2021

The original purchase invoice should be attached as evidence of personal ownership.

Ensuring sufficient cash is in your company after paying for the asset

The expenditure is purely capital and not processed until the end of the financial year. You will need to allow for this to maintain the appropriate level of funds in your company. To ensure that your company still has sufficient funds for the tax liabilities after the expense, you should adjust your available funds for payment as a dividend as follows:

Capital Asset purchased, value £1,000

Personal use of a capital asset

Capital assets purchased should be solely for business use. Any personal use should be insignificant. If personal use becomes relevant a personal tax charge, known as a  Benefit in Kind charge, will apply based on the value of the capital asset.

The method of taxation depends on the asset purchased. If any personal use is anticipated it may be better to acquire the asset personally. Whether you purchase the capital asset personally and claim the expense as a reimbursement from your company, or directly through your limited company you need to retain a document recording the transfer or an original receipt in your Company Accounts. The receipt will be processed in your financial Year-End Accounts.