- - What are capital allowances?
- - What can I claim capital allowances on?
- - Plant and machinery
- - A few conditions
- - Capital allowance categories
- - Why are there different types of capital allowance?
- - Annual Investment Allowance (AIA)
- - First year allowances (FYA)
- - Writing down allowances
- - Super deduction
- - Small pools allowance
- - Business cars
What are capital allowances?November 18, 2021
Whether you're starting a new business or are simply looking to upgrade what you've got, you might be hesitant to splash out on any new equipment, especially if you're keeping a close eye on your cash flow.
However, sometimes these big purchases are necessary for the day-to-day operations of a business, with some businesses unable to complete their work without having these items to hand.Recognising the necessity of these large purchases, the government offers business owners the chance to claim back tax on these items through capital allowances, a scheme aimed at incentivising sole traders, partnerships and limited companies to invest in their businesses.
In this article, we'll be covering what exactly capital allowances are, what you can claim back on, and how you can make a claim to HMRC.
What are capital allowances?Capital allowances are tax breaks offered to businesses who have recently invested in assets intended for long-term use in the business. These breaks allow businesses to deduct 100% of the cost of an asset from their total profits, subsequently reducing their taxable profit and lowering the total amount of Income Tax or Corporation Tax they owe to HMRC.
Businesses can claim capital allowances when they invest in a capital asset, which is a larger and more expensive investment than what would typically classify as an allowable expense. These larger assets, such as computers or specialist equipment, are intended to last a long period of time, and as a result depreciate — or, in non-accounting terms, lose intrinsic value — over time.
To counter depreciation, capital allowances can be used to claim tax relief on the item for the cost of the item when acquired by the business. This typically means that you would deduct the price you paid for the asset from your total profits at the end of the year, but if the asset was owned before the business opened or was gifted, you would only be able to claim the market value (the total amount you'd expect to sell the asset for) of the item.
What can I claim capital allowances on?Unlike allowable expenses, capital allowance can be claimed on items intended to be used in the business for an extended period of time. These can be split into tangible and intangible assets.
The majority of tangible assets that can be claimed back as capital allowances fall under the category of plants and machinery, encompassing equipment, machinery and business vehicles, such as cars, vans and lorries. Intangible assets, on the other hand, include non-physical items such as patents, research and development and 'know how' (intellectual property about specific industrial techniques).
Plant and machinery
To make it clear what plant and machinery you can claim for, it's easier to start with ruling out what you can't. Despite fitting the generic description of what plant and machinery items are, you cannot claim capital allowances on the following:
- Things you lease — they must be your property
- Buildings, including doors, gates, shutters, mains water and gas systems
- Land and structures, for example bridges, roads and docks
- Items used for business entertainment (yep, that means you can't claim back on the karaoke machine you only bring out at work functions)
When it comes to claiming capital allowances, the following categories classify as plant and machinery:
- Items that you use to keep in your business, including cars
- Integral features
- Alterations to a building to install other plant and machinery (excluding repairs)
- Costs of demolishing plant and machinery
|Lifts, escalators and moving walkways||Fitted kitchens|
|Space and water heating systems||Bathroom suites|
|Air-conditioning and air cooling systems||Fire alarms and CCTV systems|
|Hot and cold water systems (excl. toilet and kitchen facilities)|
|Electrical systems, incl. lights|
|External solar shading|
A few conditions
Before you can claim for any assets that fall under the category of "plants and machinery", there are a few conditions that need to be met before HMRC can approve the claim.
The location of the capital assets are just one subset of conditions that must be met when looking to claim for capital allowance. For instance, you can claim back on capital assets if you rent or own the building, but only the person who purchased the asset in question can make the claim.
If you're looking to claim on items in a property you let out, you can only claim capital allowances if the property is available for holiday letting for at least 210 days, and has been let out for 105 or more.
The agreed value of the item can also affect whether or not you can make the claim. In the majority of cases, the value is the amount you paid for the item. In some instances, however, you'd need to use to item's market value — the amount you'd expect to sell the item for — if the item was owned prior to you starting your business, or the item was gifted to you.
If you've bought a building from a previous owner, you can only claim for the integral features that they also claimed for. If you're looking to claim on certain fixtures, you must agree the value with the seller, both in order for you to make a claim and for the person selling the assets to correctly account for them.
Capital allowance categories
Once you've settled on the items you're looking to claim back on, the next step is to decide what you're going to claim them back as.
This might sound confusing, but stick with us — we'll be breaking down the different types of capital allowances you can claim back under and the amount you would typically claim back under each of them.
Why are there different types of capital allowance?
It all boils down to tax-efficiency. With different capital allowances available, business owners are given more options to get more of their tax back, all the while investing in valuable infrastructure that can boost their businesses.As part of the 2021 budget that saw the introduction of the super-deduction, business owners were offered a variety of extensions and expansions on the standing capital allowances set by the government with the intention of kickstarting investment. A report published by HM Treasury states:
"Much of the UK's productivity gap with competitors is attributable to our historically low levels of business investment compared to our peers. Weak business investment has played a significant role in the slowdown of productivity since 2008."
With the government looking to encourage business spending, more money is being made available to claim back as business expenses — so if you've been looking to upgrade your equipment, now is the time to do so.
Annual Investment Allowance (AIA)
If you're looking to splash out on a pricey piece of equipment, you might be eligible to claim annual investment allowance. AIA offers business owners the chance to deduct the full price of a capital asset from the company's taxable profits in the same accounting period that the asset was purchased in.Since its introduction in 2008, the AIA amount has changed several times, with each update typically announced in the Chancellor of the Exchequer's annual budget. In an effort to promote investment in the post-Covid economy, Chancellor Rishi Sunak announced a record-high AIA limit of £1m until 31st March 2023.
AIA can be claimed on most plant and machinery up to the AIA amount, and can only be claimed in the period you purchased the item. This can be either when you signed the contract if payment for the item is within the next 4 months, or when the payment is due if payment for the item is more than 4 months away.
If you buy an item under a hire purchase contract, you can claim as soon as you start using the item, even for the payments that have not yet been made. You cannot, however, claim on the interest payments.
AIA cannot be claimed on cars, items you owned prior to starting your business, or items gifted to you or your business.
First year allowances (FYA)
Although you can't claim AIA on a shiny new business car, you might be able to claim first year allowances — although the car that you buy can affect the total amount you can claim (more on that later).
Much like AIA, first year allowances enable business owners to claim the full cost of an asset against business costs in the first year of purchase. Despite offering the same deductions as AIA, the items that qualify for FYA differ, meaning you can claim both AIA and FYA in the same accounting period.
'Enhanced capital allowances' (a type of first year allowance) can be claimed on the following assets:
- Energy saving equipment, such as certain motors
- Water saving equipment, such as water meters
- Plant and machinery for gas refuelling stations
- Gas, biogas and hydrogen refuelling equipment
- New zero-emission goods vehicles
- Some cars with low CO2 emissions
If you have accrued some costs that you can claim 100% FYA against, the expenditure will be considered 'fully received' and you won't be able to claim for any other items on the allowance.
Writing down allowances
If you've maxed out your AIA or FYA allowances within a single accounting period, or if you simply can't claim a certain asset under them, you'll likely be able to claim back through a writing-down allowance.
Writing down allowances are annual allowances that you can claim to reduce outstanding balance from plant and machinery expenses that haven't yet already been claimed.
The percentage you can claim as a writing down allowance is determined by the asset that you're trying to claim for. For instance, the percentage you can claim for cars is determined by their CO2 emissions.
To work out how much you can claim, you'll first need to work out the market value of the item. As mentioned above, this is typically the amount you spent on the item, or if gifted or owned before you started your business, the amount you'd expect to sell it for.
Once you've worked out the value of the item, you next need to group the items you're planning to claim for into pools based on the percentage rate they qualify for. The different pools available are as follows:
|Main||18%||Value of all 'plant and machinery' assets, excluding those that appear in the single asset or special rate pools|
|Single asset||18% or 6%, depending on the item||
To calculate your allowance for each pool, take your closing balance from your last accounting period and add it to the value of anything you've bought or been given in the current period that qualifies for the pool you're calculating. Deduct the value of anything you've sold or disposed of that initially qualified for the pool, and using the pool's rate work out your claim.Once you've worked out your claimable amount, you can deduct this from the pool's total value to get the closing balance, known as the 'tax written down value.' These figures can be added to your Self Assessment tax return if you're a sole trader or to your Company Tax Return if you're a limited company, lowering your taxable profit and subsequently the amount you pay in Income Tax and Corporation Tax respectively.
Super deductionNot only has the AIA limit been set to the highest amount in history, the 2021 Budget heralded the introduction of a new 'super deduction' on certain capital expenditure between 1 April 2021 and 31 March 2023. This super deduction offers business owners the chance to claim 130% deduction in a single year, without a maximum cap (cars excluded).
This deduction is applicable to assets that would typically qualify for 18% plant and machinery writing down allowances. However, items that fall in the special rate pool will, under the super deduction, qualify for a first year allowance of 50% in what is being dubbed as the 'SR allowance.'
If you're not sure whether it's better to claim AIA or SR allowance based on your business's circumstances, you can get in touch with one of our expert accountants to find the most tax-efficient options for you.
Small pools allowance
If the items in a pool amount to less than £1,000, you can instead claim small pools allowance. In this instance, you may be able to claim the whole amount as opposed to the 18% upper limit imposed by the writing down allowance. This does not, however, apply to single asset pools.
Unlike AIA and FYA, if you claim a writing down allowance you cannot also claim for small pools allowance. It's therefore beneficial to work out how much you can save in tax through writing down allowances and through small pools allowance, and choose which allowance to claim from there.
When it comes to claiming capital allowances, business vehicles appear to have their own set of rules. Despite classifying as plant and machinery, you cannot use AIA to claim back for a car, and instead must calculate your claim through writing down allowances.If you're a sole trader or partner, you can claim simplified expenses on business vehicles on the basis you haven't claimed for them in another way already.
For capital allowance purposes, a car is a vehicle that is suitable for private use (including motorhomes), used privately by most people and was not built for transporting goods.
The amount you can claim back for cars is dependent on two criteria: the CO2 emissions of the car, and the date you bought it. Depending on the category your car falls into, you can claim either first year allowances or main rate allowances.
The rates on cars bought from April 2021 are as follows:
|New and unused, CO2 emissions are 0g/km (or car is electric)||First year allowances|
|New and unused, CO2 emissions are between 1g/km and 50g/km||Main rate allowances|
|Second hand, CO2 emissions are between 1g/km and 50g/km (or car is electric)||Main rate allowances|
|New or second hand, CO2 emissions are above 50g/km||Special rate allowances|
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