Capital Allowances allow businesses to reduce their taxable profits by deducting the cost of certain assets they purchase for their business. It also enables businesses to spread the cost if a purchased asset over multiple tax years and claim the deductions for each year.
Company purchased £20,000 machinery on 1 April 2018 with a useful economic life of 4 years and has taxable profits for the year to 31 March 2019 of £100,000. The £20,000 will be eligible for the annual investment allowance:
| Capital allowances pool | |
|---|---|
| Additions (machinery purchased 1 March) | £20,000 |
| Annual Investment Allowance | (£20,000) |
| Balance carried forward | £nil |
| Tax computation | |
| Taxable profits | £100,000 |
| Add: Depreciation | £5,000* |
| Less: Capital allowances | (£20,000) |
| Profits chargeable to Corporation Tax | £85,000 |
| Corporation Tax @ 19% | £16,150 |
* Depreciation has been calculated by spreading the purchase price over the useful economic life (£20,000 / 4 = £5,000 per year).
Company purchased a car at cost for £25,000, with CO2 emissions above 110g/km on 1st April 2018. Depreciation is calculated at 25% on a straight line basis. Taxable profits for the year ended 31 March 2019 were £100,000.
| Capital allowances special rate pool | |
|---|---|
| Additions | £25,000 |
| Writing Down Allowance @ 8% (ii) | (£2,000) |
| Balance carried forward | £23,000 |
| Tax computatio | |
| Taxable profits | £100,000 |
| Add: Depreciation | £6,250 |
| Less: Capital allowances | (£2,000) |
| Profits chargeable to Corporation Tax | £104,250 |
| Corporation Tax @ 19% | £19,808 |
i) For the financial year commencing 1st April 2018, the corporation tax rate falls to 19%.
ii) If you purchase a car with CO2 emissions of less than 50g/km, then you would receive a full 100% deduction.
