If you purchase an asset for your business, like machinery, tools or a car, you can’t deduct the amount from your profits as you would with general expenses. However, the expense may be eligible to be claimed as a capital allowance. Assets which you buy for your business and which qualify as business assets will gradually reduce in value. Capital allowances are a tax relief which compensates for the reduction in value by allowing you to write off the cost of the asset against your taxable business income. Companies and organisations which pay Corporation Tax, sole traders, self-employed and partnerships can all claim capital allowances.
Capital allowances may be claimed for assets which are used for your business. Plant and machinery allowances are available for items like vehicles, machinery, tools, office equipment and computers. Specified criteria have to be met before a claim will be approved. Changes have been introduced to capital allowances which came into force from April 2012. The changes will mostly affect businesses which are making investments in plant and machinery. The annual investment allowance was increased to £100,000 from April 2010. However, from April 2012 the amount of annual investment allowance has been reduced to £25,000. Cars are not eligible for the annual investment allowance and the amount you can claim for cars purchased after 6th April 2009 will be based on the car’s CO2 emissions. Cars with emissions over 160g/km are eligible for writing down allowances at eight per cent and are entered in the special rate pool. Cars with emissions below 160g/km are put in the main pool and are eligible for writing down allowances of 18 per cent. The percentages for writing down allowances prior to 6th April 2012 were 10 and 20 per cent respectively. If a business purchases a new car with emissions of 110g/km or less, the car will qualify for 100 per cent allowance.
An annual investment allowance is available from April 2012 for up to £25,000. The amount from April 2010 to April 2012 was £100,000. Purchases of assets should be added together, not including purchase of cars, and up to £25,000 can be claimed as annual investment allowance. If the total amount is more than £25,000, claim the annual investment allowance and the remainder should be added to the general pool of expenditure. If your total cost of assets exceeds £25,000 add them all together, including cars with emissions below 160g/km, and deduct the £25,000 annual investment allowance. The remainder will be eligible for writing down allowances of 18 per cent. The amount left is carried forward to the following year.
There is also special rate expenditure which includes items which are expected to last more than 25 years, integral features like lifts or electrical systems and thermal insulation. These items qualify for special rate allowances of eight per cent. It is possible to use the annual investment allowance against the special rate expenditure rather than the general pool of expenditure.
If you are left with a balance of £1000 or less in either the main pool or special rate pool, the whole amount can be claimed as a small pools allowance. If the 12 month accounting period of a business is outside the tax year of 6th April to 5th April, the allowances may have to be calculated separately. For instance, where an accounting period falls into 1st January 2012 to 31st December 2012 the allowances will be calculated differently, as the annual investment allowance reduced to £25,000 from 6th April 2012. The writing down allowances have also been reduced from April 2012. There are so many variants and criteria when calculating capital allowances that professional advice may be required.
The Accountancy Partnership
We are a national firm of accountants that specialise in small and medium sized businesses. We have been trading since 2006 and have more than 1,000 clients across many different industries and areas of the UK.
Our staff has a wealth of experience and qualifications from the major accountancy and tax associations such as ACCA, AAT, ICPA, IFA, and FTA.
Our clients receive many benefits including:
Disclaimer: The information contained in these articles is of a general nature and no assurance of accuracy can be given. It is not a substitute for specific professional advice in your own circumstances. No action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a consequence of the material can be accepted by the authors or the firm.