What capital allowances am I entitled to?
You might have heard of capital allowances, but did you know they can benefit your business? That’s because they can be used to save tax when you buy a new asset.
But what exactly are they and what can you claim for? Read on for a quick overview of what you need to know.
What are capital allowances?
In essence, a capital allowance is a way to reduce your tax bill. If you use them effectively, they can be a huge boost to your business.
You can claim capital allowances when you buy assets that are essential to running your company – such as IT equipment, machinery and business vehicles. The cost of these items is then deducted from your profits before tax is calculated, reducing the amount you’ll have to pay.
What can I claim for?
The most common type of capital allowance is plant and machinery. This includes things such as electronic equipment, business vehicles and integral features in your workplace – for example fire alarms and CCTV systems.
What are the benefits?
If you purchase an asset through your company the cost is written off over a period of time. It remains on your balance sheet, while its value depreciates over time. This will appear on your profit and loss account as an annual expense.
Because these assets aren’t tax-deductible, claiming capital allowances is a great way to obtain relief on qualifying purchases.
This tax relief can also be carried over, so you can use capital allowances straight away or save them for the future. For example, if your business has made a loss one year, you might want to wait until you’re making a profit.
How much can I claim?
There are different rates for the different types of assets you purchase. Here’s a quick overview of the common ones:
Annual Investment Allowance (AIA)
This gives you the chance to claim 100% of the cost of your assets, up to a maximum of £200,000, for 12 months from January 2016. It covers the majority of plant and machinery purchases.
Writing Down Allowance (WDA)
This covers a lot of the things that you can’t claim for using your AIA, such as cars. It can also be used if the value of your assets exceeds £200,000. The rate of tax relief you’ll receive will either be 8% or 18% depending on the type of asset you purchase.
First year allowance
Assets that qualify for first year allowance relief can be deducted in full from your profits before tax. They don’t count towards your AIA either, so you’ll still be able to claim the full £200,000.
The types of assets you can claim for include cars with low CO2 emissions, energy-saving equipment and water-saving equipment.
What happens when I sell an asset?
If you decide to sell something you claimed capital allowances on, the process you’ll need to follow is rather tricky – especially if you used your AIA. The best course of action here is to speak to a professional, as you could end up having to give back some of the tax you saved.
How do I claim?
You claim capital allowances when you do your tax return. If your company is subject to Corporation Tax, you have two years from the end of the accounting period in which you bought the asset to claim. For Income Tax purposes, the time limit is 31st January following the tax year in which the asset was bought.
Need more advice?
We hope this guide has shed some light on how capital allowances can benefit your business. If you need a bit more information, our tax experts are here to help.
To get in touch with our team, please call 08000 149 597 or email email@example.com.
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