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Capital allowances are designed to provide tax relief on the purchase of some assets used for a company, business or organisation. Although there are different types, there are specific rules for each one when making a claim. The rules will dictate how much can be claimed, if anything is allowable. The cost of an asset can’t be deducted from the gross profit, unlike business expenses. Capital allowances are a type of tax relief that lets you write off the cost of the asset against taxable profits.

What are capital items?

Most items bought solely for business use will last for much longer than one year, including computers, machinery, and vehicles. The cost of these items can’t be claimed back all at once, as in the case of business expenses, but you can claim tax relief. Not all purchases will be eligible for capital allowances, which can only be claimed if you have bought the item, rather than renting. The payments which you make under an ‘operating lease’ may be claimed as expenses. Capital items are generally plant and machinery, some expenditure for research and development, and some types of building work.

Annual Investment Allowance

From April 2008, businesses have been able to claim back a specified amount each year for the purchase of plant and machinery. Each year, claims can be made up to a specified amount and from April 2012, the annual amount was increased to £25,000. Finance Act 2013 was introduced, and the Annual Investment Allowance was increased temporarily to £250,000. This amount is for the period 1st January 2013 to 31st December 2014. The total cost of the qualifying plant and machinery is allowable, up to the annual limit. The balance of the cost may be eligible for writing-down allowances. Expenditure for cars is not allowable, and is the main exception.

Writing-down allowances

Expenditure that exceeds the annual amount claimed for the cost of a capital item may be eligible for a writing-down allowance. There are two rates that may be claimed – 18 per cent for items in the main pool and eight per cent for items in the special rate pool. The residual amount of expenditure will normally be placed in the main pool, but some items are entered into the special rate pool, including some types of car, assets that are expected to last more than 25 years, and some integral features in the building.

There are many more types of capital allowance and regulations that must be adhered to. It is advisable to seek professional guidance so that you can maximise the benefits.

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About The Author

Karl Bilby

We work very closely with our expert accountants to bring you the latest factually correct tax and accounting news. We also enjoy writing about small business news that we hope you find useful!

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