How Capital Allowances can Reduce Your Tax Bill

If you have or are planning to purchase fixed assets for your business, you may be eligible for a tax reduction. Below we will discuss what capital allowances are and how you can use them to strengthen your tax planning.

What are Capital Allowances?

There are two main expenditures made within a business: revenue and capital. Revenue is usually spent on repairs, like door replacements or walls being repainted, whereas capital expenses are used for items that provide a benefit for the company. This includes things like machinery, equipment, or vehicles.

Capital allowances are a way of achieving tax relief on some types of capital expenditures. By treating them as another business expense and reducing the taxable profit within the basis period, allows businesses to write off the cost of certain assets against taxable income.

Writing Down Allowance

Working out how much you can claim is simple. It’s usually the amount you paid for the item. If you owned the asset before you started using it within the business, or it was given as a gift, you would use the market value. However, you would use a process called Writing Down Allowances (WDA). This allowance lets you deduct a percentage of the pool value from your profits each year. The two pool rates are, Special Rate Pool 6% and Main Rate Pool 18%.

The special rate pool of 6% is used for cars (old and new) with CO2 emissions less than 50g/km, integral fittings within the commercial buildings (lifts, air condition units, heating equipment) and long-life items over £100k annual spend. The main rate pool of 18% is used for everything else.

Annual Investment Allowance

Annual Investment Allowance (AIA) is the largest capital allowance a business will utilise. Before March 2023, companies are able to deduct up to £1,000,000 for assets used in their trade, it will then fall to £200,000. Most assets that have a total up to the AIA can be claimed in full within the year of purchase. The main exceptions are cars and items you owned before putting them into the business.

First-Year Allowances

For some assets, there are First-Year Allowances (FYA) available. This offers relief of 100% of the price from items that are classed as ‘green’ technology and deemed to be energy efficient. These include:

• New vehicles with low CO2 emissions
• Specified energy-saving and water-saving equipment
• Plant and machinery for gas refuelling stations
• Gas, biogas and hydrogen refuelling equipment
• New zero-emissions goods vehicles

The benefit of these two schemes is that your company could potentially claim both £200,000 worth of AIA and 100% of your green technology if you invested in the right assets.

Super-deduction

Back in the 2021 Spring Budget, the Government introduced the Super-deduction, with the aim of encouraging businesses to invest in fixed assets, growth and the recovery of the business economy. Since the COVID-19 pandemic, business investment has fallen with a reduction of 11.6%. Offering a substantial amount of capital allowance on any qualifying assets will reduce a company’s tax bills and free up expenses to re-invest back into their business.

From April 1st 2021 until March 31st 2022, the allowances have been increased. Assets that qualify for Annual Investment Allowance (AIA) or for inclusion in the Main Rate Pool will attract a First-Year Allowances (FYA) of 130%, with items included in the Special Rate Pool, eligible for a First-Year Allowances (FYA) of 50%.

It’s important to note that super-deduction only applies to UK limited companies and not to self-employed businesses or sole traders.

How do I Claim Capital Allowances?

Capital allowances are not given automatically – they must be claimed in a tax return. The good news is that there are no time limits on claiming capital allowances; if the asset is still owned and used by the business, you will be able to make a claim.

Here at Hysons, Chartered Accountants, we are a highly qualified and knowledgeable team, ready to provide any advice and help you may need with business plans and finance applications. To find out more or to get a quote, contact us today.