All businesses are taxed on their profits which are essentially, sales less allowable expenses. Revenue costs, better known as trading expenses, can be claimed in full in the year of expenditure. However, if a business purchases an item that will have a lasting benefit for the business for longer than a year, it will be classed as capital expenditure. Most individuals running a business have a reasonable idea of how to claim for revenue costs, but don’t have much of a clue when delving into the arcane world of capital allowances.
Capital allowances (CA’s), which are in essence the tax equivalent of depreciation, are clouded in mystery for a significant minority of individuals running a business. I’m often asked questions by a bemused client, such as: what are they, what can you claim for, why aren’t they the same as depreciation etcetera.
It is also worth noting that a capital allowance (CA) is often referred to as a writing down allowance (WDA) because it provides a tax deduction over a number of years, with the original value reducing every year.
Can all capital expenditure qualify for CA’s?
Most but not all is the answer, as the expenditure must be on a particular type of asset you have purchased, which include such things as vehicles, computer equipment, tools and machinery. Excluded from this list are any items hired or leased, which are claimed for as revenue costs.
Also excluded is the cost of most buildings (but see SPA single asset pools below), although it is possible to claim for part of the cost of the building which relates to integral features (eg a ventilation system) or to fixtures (eg shelving). However, there are no CA’s available if the building is a residential property.
Can I claim CA’s on privately owned items used in the business?
The answer is yes and over 90% of claims in this area relate to vehicles, which may be claimed for but only on the basis of the proportion of business use. You must restrict the CA’s that you claim on your SA tax return to exclude the amount relating to the private use.
If for example, your car is worth £10,000 and its private use is 33%, CA’s would be 18% of £10k or £1,800, but as you claim is restricted by 33%, then you would only actually be able to claim two thirds, or £1,200. Also, the value of the car carried forward to the next tax year will be reduced by the full £1,800.
What are the different rates of CA’s and what are CA pools?
If you’re claiming CA’s, you must group items into one of several capital allowance pools depending on their type and which rate they qualify for. The 6 types of pool are:
- A main pool in which assets are grouped together, with a CA rate of 18%, includes any commercial vehicles
- A small pool If you have a balance of £1,000 or less in your main general pool; this allows you to claim a 100% small pools allowance on the full amount of the small pool
- A special pool for parts of a building considered integral (such as lifts, escalators, heating systems air-conditioning, thermal insulation, electrical and lighting systems, external solar panels etcetera with a rate of 8%
- A special pool for each car in the business, If the car has CO2 emissions below 50g/km CA’s of 18% can be claimed, but for CO2 emissions above 50g/km, such as a 5 litre Ford Mustang, the CA rate is 6%. To check your vehicle, go to: https://www.gov.uk/co2-and-vehicle-tax-tools
- A single asset pool for items of high value with a rate of 18% or 8% depending on the item
- A SPA (structures and buildings allowances) single asset pool for industrial buildings, with a 3% flat rate relief over 33.3 years
If you scrap an asset it will not have any effect on the pool it is in unless it is in a special pool or in a single asset pool. In these cases, you can claim 100% of the remaining value (see balancing allowance below). If however, you are merely selling an asset, you must deduct the sales proceeds from the balance of the pool it is in.
What is an annual investment allowance (AIA)?
The AIA provides 100% tax relief in the year of purchase, on assets qualifying as plant and machinery, subject to an annual maximum (£1 million to 31st March 2022) and excluding cars unless they are electric. Also, it is not possible to claim the AIA on assets that you owned and used for another reason (such as for personal use) before using them within the business, in which case you may use the small pools allowance or claim a writing down allowance in the main general pool.
Additionally, in last year’s budget a special 130% super-deduction capital allowance was announced to encourage companies to invest in a new plant and machinery; plus, for special pool assets, a 50% first-year allowance was announced.
What are balancing allowances and charges?
A Balancing Allowance is a special type of capital allowance which can be claimed when an asset is disposed of or the business comes to an end. It occurs when the disposal proceeds are less than the written down value (WDV) brought forward. To illustrate the point here is an example:
Leo is a carpenter and bought a large bandsaw for £10,000 4 years ago and has claimed £5,500 worth of CA’s over the 4 years. Leo then sells the bandsaw for £3,000, which is less than its WDV of £4,500. Leo can then add a balancing allowance to his profit to reflect this, which is achieved by adding the sale value to the CA’s claimed and then subtracting that figure from the original cost price; £3,000+£5,500 = £8,500 – £10,000 = £1,500 which is the balancing allowance.
A Balancing Charge is the opposite side of the coin to a balancing allowance and occurs when an asset is disposed of or the business comes to an end, with the disposal proceeds being more than the written down value (WDV) brought forward. To illustrate the point here is an example:
Barbara is a driving instructor, who bought a car for her business 6 years ago for £16,000. She has claimed £10,000 worth of CA’s over the 6 years and then sells the car for £8,000, which is more than its written down value of £6,000. Barbara must add a balancing charge to her profit to reflect this. This is achieved by adding the sale value to the CA’s claimed and then subtracting that figure from the original cost price; £8,000+£10,000 = £18,000 – £16,000 = £2,000 which is the balancing charge.
To put it simply, a balancing allowance is tax-deductible whereas a balancing charge is taxable income.
Tax Accountants Comment
Even though I have tried my best to explain capital allowances in relatively simple terms, I do appreciate that this is a confusing subject, which many individuals struggle with. So, having read my Blog if you are still confused call your accountant or get in touch with me via the link provided.
