Maximise your capital allowances

Introduction


As a business you can claim tax allowances, called capital allowances, on certain purchases or investments. This means you can deduct a proportion of these costs from your taxable profits and reduce your tax bill.

Capital allowances are available on plant and machinery, buildings - including converting space above commercial premises to flats for renting - and research and development.

The amount of the allowance depends on what you're claiming for. In some cases, the rates are different in the year you make the purchase from those in subsequent years.

This guide will tell you what purchases or investments qualify for a capital allowance, how much you can claim and the simplest way to make your claim.

Most businesses purchase equipment as a necessary part of their day to day running. This means that often, due to obsolescence or wear and tear, most businesses need to replace such assets on a regular basis.

Capital allowances are tax allowances that one can claim in relation to the purchase of capital equipment or fixed assets.

Generally the tax rules allows that you can only claim a percentage of the equipment cost in the year in puchaseand the remainder of the equipment cost over future years.

To maximise your allowance, if possible, make new equipment purchases before the year end rather than at the begining of the next accounting year.

The result is that you can benefit from bringing your capital allowances forward one year.

Capital allowance on plant and machinery

You can claim capital allowances on:

the cost of vans and cars, machines, scaffolding, ladders, tools, equipment, furniture, computers and similar items you use in your business
expenditure on plant and machinery
items you used privately before using them in your business

You cannot claim for things you buy or sell as your trade - these are claimed as business expenses. If you buy on hire purchase, you can claim a capital allowance on the original cost of the item but the interest and other charges count as business expenses.


How much you can claim


If you're buying equipment, 20 per cent is the standard annual allowance for businesses each year. There is a special rate pool containing expenditure on integral features, long life assets and thermal insulation. The annual rate of allowance for it is 10 per cent. In a few cases you can claim 100 per cent in the year you make the purchase. See what purchases qualify in our guide on first-year allowances. Note that 'a year' refers to a tax year, not a calendar year.

For the 2008/09 tax year, all businesses have an Annual Investment Allowance (AIA) on the first £50,000 of expenditure on plant and machinery. There is also a tax credit for losses incurred through capital expenditure on some types of environmentally-friendly technologies. In addition, small businesses may be able to claim a plant and machinery writing-down allowance of up to £1,000 where the balance of the pool is less than £1,000 in a 12 month accounting period.

The AIA replaces the previous system of first-year allowances on plant and machinery expenditure of 50 per cent for small businesses and 40 per cent for medium-sized businesses.

Capital allowance on buildings

You can claim capital allowances on the cost of:

renovating or converting space above shops and other commercial premises to provide flats for rent - for example, money spent on building dividing walls or fitting a new kitchen
converting or renovating unused business premises in a disadvantaged area
You cannot claim capital allowances on the cost of:

houses, showrooms, offices and shops
the land itself, such as buying the freehold of a property or acquiring a lease
extensions, unless it provides access to qualifying flats
developing adjacent land
furnishing qualifying flats

How much you can claim

The allowance for buying industrial and agricultural buildings is 4 per cent, in both the first and subsequent years. The allowance is progressively reduced from 1 April 2008 for companies, and from 6 April 2008 for income tax cases. Both of these allowances will be withdrawn from April 2011. You can usually claim 100 per cent of the cost of converting underused or vacant space above commercial property into flats or converting or renovating unused business premises in a disadvantaged area. You can read a guide on flat-conversion allowances on the HM Revenue & Customs (HMRC) website - Opens in a new window.

You can claim 100 per cent of the construction cost of commercial and industrial buildings, including offices, in enterprise zones. If you buy a used building in an enterprise zone within two years of its first use, you can claim 100 per cent of the cost or 25 per cent a year of the cost. However, this allowance is to be withdrawn from April 2011.

The rate of writing-down allowances on some integral features of a building is 10 per cent for the 2008/09 tax year.

Research and development capital allowances

You can claim tax credits on certain types of research and development (R&D) expenditure. As a general rule, an activity qualifies as research and development if:

it involves innovation and creativity in science and technology
the research is relevant to your business
you are classed as a trader and not working in a profession or vocation
How much you can claim
Small and medium-sized companies can claim enhanced tax relief of 175 per cent of qualifying R&D expenditure in the form of tax credits. For large companies, the enhanced deduction is 130 per cent.


Extra relief is also available for certain revenue expenditure. I will with tax reliefs and allowances for research and development in a separate article..

Work out your capital allowance claim

Most first-year capital allowances have been replaced by an Annual Investment Allowance (AIA) of £50,000 for all businesses. However, in certain circumstances both small and medium-sized businesses can still claim capital allowances of 100 per cent in the year they make the purchase, for example with the purchase of energy-saving technologies.

Claiming for subsequent years


The writing-down allowance for most plant and machinery purchases is 20 per cent. If the expenditure is 'special rate expenditure' the writing down allowance is 10 per cent. In addition, small businesses may be able to claim a plant and machinery writing-down allowance of up to £1,000 if the pool value falls below £1,000 in a 12 month accounting period.

Capital allowances on buildings are calculated on a straight-line basis. This means you can claim 4 per cent of the initial investment every year. For example, if you spend £100,000 on constructing an industrial property, you can claim £4,000 a year.

Many of these allowances are due to be withdrawn from April 2011.

Balancing charges


If you sell an item, give it away or stop using it in your business, you may need to add a balancing charge onto your profit before you calculate your tax.

Claiming capital allowances

Use your income or corporation tax return to claim for capital allowances.

When making the claim:

You must make a separate claim for each accounting period of your business. If this is longer than 18 months, you'll need to split it into shorter periods and make separate claims for each. The first 12 months is one period, and each subsequent 12 months, or less than 12 months, is another period.

You can make a capital allowance claim any time up to the normal time limit for making or amending your tax return (income tax) or 12 months after the filing date for your Company Tax Return. This will be extended if there is an enquiry into the return.

There is no obligation to claim for the full amount of an allowance. If you claim only part, eg 10 per cent instead of the 25 per cent you are entitled to, then the pool balance carried forward will be higher so claims for later years will be higher.

If your business is a partnership, you need to claim your capital allowances collectively, not as individual partners.

If you're registered for VAT, you only claim capital allowances on the net cost of the asset. If you're not registered for VAT, you claim capital allowances on the total cost including VAT.

Special cases - capital allowance

You can claim capital allowances for assets you own and lease to other users. Some of these rules cover items you use privately as well as for business.

Cars


The following applies to expenditure incurred on or after 1 April 2009 for businesses in the charge to corporation tax, and on or after 6 April 2009 for businesses in the charge to income tax. However, note that these arrangements are subject to Parliamentary approval.

Qualifying expenditure on cars (except cars used by income tax payers for both business and non-business purposes, which is allocated to single asset pools) must be allocated to one of the two general plant and machinery pools. Which pool is appropriate depends on the car's CO2 emissions:

expenditure on cars with CO2 emissions over 160 grams per kilometre (g/km) driven will be dealt with in the special-rate pool and will attract writing-down allowances at 10 per cent
expenditure on cars with CO2 emissions of 160g/km driven or less will be dealt with in the main pool and will attract writing-down allowances at 20 per cent

Note that if the car has CO2 emissions are below 110g/km, it qualifies for 100 per cent first-year allowance.

Cars purchased before 1/6 April 2009 continue to be treated under the old rules for a transitional period of five years. This means that cars costing:

less than £12,000 continue to be handled in the main rate pool (20 per cent capital allowance) regardless of their emissions
£12,000 or more continue to be pooled in a single asset pool with a 20 per cent capital allowance capped at £3,000 per year

The transitional period for cars purchased before 1 April 2009 for corporation tax and before 6 April 2009 for income tax will end on the last day of the business' first chargeable period to end on or after 31 March 2014 for corporation tax and 5 April 2014 for income tax