If you buy an asset for use in your business, you cannot deduct your expenditure on that asset from trading profits. Instead you claim a capital allowance for that expenditure. Capital allowances can be claimed on:
The aim of capital allowances is to provide tax relief for the reduction in value of certain capital assets by letting you write-off their cost against the taxable income of your business. You won't necessarily be able to claim all the expenditure on an asset in the accounting period when you bought it.
The amount you can claim also won't usually be the same as the 'depreciation' in your year-end accounts as this is calculated differently. Depreciation is an accounting concept that aims to spread the cost of the fixed assets your company purchases over the period that you use them. HMRC does not allow depreciation to be deducted in the calculation of the taxable profit. In arriving at the taxable profit (the amount on which your tax liability will be based) you add back the depreciation and deduct the capital allowances in your company tax return.
Where you purchase inexpensive items of equipment, instead of claiming capital allowances you may be able to claim an expense deduction for the full cost in the year that they are acquired. This could apply if the cost of the item is small and it replaces one on which capital allowance have not been claimed. These could be items such as small tools or protective clothing.
There are different types of capital allowances. For each allowance, there are special rules to calculate how much relief you can claim. You have to follow these rules, rather than the method used in your accounts for calculating depreciation.
From 1 April 2021 and 31 March 2023, companies will be able to claim a 130% deduction for most new plant and machinery, 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 p.a., 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:
The annual investment allowance cap has varied over the previous years, however, qualifying assets acquired after 1st January 2019 to 31st December 2020 are subject to a cap of £1,000,000.
Annual Investment Allowance is calculated by adding the cost of your purchases within the same accounting period together. If the total is less than the “capped” amount you can claim 100%. Example 1 shows how this works.
Plant and machinery 'enhanced capital allowances ' enable you to make a claim for up to 100 per cent of the cost of certain qualifying items against your business profits in the year of purchase. Enhanced Capital Allowances of 100 per cent are currently available for expenditure on:
· Certain energy-saving and water efficient equipment, but only if the item appears on a specific list of qualifying equipment
· Certain vehicle gas refuelling equipment
First Year allowances relate principally to electric or very low CO2 emission cars if their CO2 emissions are less than 50 g/km from 1st April 2018. These apply to new cars only.
The “ECA” and “FYA” are in addition to your available annual investment allowance.
If the motor car does not qualify for first year allowances then it will either be allocated into the “General Pool” or “Special Rate Pool” depending on the CO2 emissions of the vehicle.
The company qualifies for a deduction of either 6% or 18% of the cost price of the car ( pro-rated if it is not a full twelve month accounting period) annually until the pool is used up. The table below summarises the capital allowance treatment of cars from 1st April 2018:
|
Cars purchased between from 1st April 2021 |
|
|
Type |
Rate |
|
FYA for electric cars or if CO2 emissions are 0 |
100% |
|
WDA if CO2 emissions are between 1-50 |
18% |
|
WDA if CO2 Emissions exceed 50 |
6% |
If you stop using an item of equipment for your work during the year, you need to make various adjustments to the allowances you have claimed. These adjustments are from the date you stopped using the item for work or sold it.
There are two types of adjustment:
Balancing allowance - The balance of expenditure brought forward from the previous year (if any), minus the sale proceeds (or market value if you did not sell them) of the items(s) at the date of cessation, or when you stopped using them for your official duties. This means that you will pay less corporation tax, as you have not fully claimed the capital allowances against the original costs of the assets.
Balancing charge - If the disposal value is greater than the value of the pool brought forward then a balancing charge may be due. This means that you will pay additional corporation tax as the proceeds on disposal means that you have received an excess of allowances.
Both the balancing allowance and balancing charge only apply to assets in the special rate pool – but can also apply to the general pool when you close your business.
