Capital allowance relief may be available on business assets purchased for use in your business, such as transport vehicles, machinery or equipment.
Items that are not eligible for a capital allowance claim include:
- Items you do not own but instead rent from a third party
- buildings, and any related doors, gates, shutters, mains water or gas systems
- structures other than buildings such as a bridge or a road
- business entertainment items
Any claimed amount may then be deducted from your taxable profit.
There are several categories of capital allowance, so before you make any claim against an eligible business asset, it is always worthwhile investigating which capital allowance scheme is the right one to use.
Most capital allowance claims are made under one of the following:
- Annual Investment allowance (AIA)
- Writing Down allowance (WDA)
- Small Pools allowance
- First-year allowance (FYA)
- Balancing allowance
Ensuring that your claim is made through the correct capital allowance scheme will not only mean that you comply with HMRC tax legislation but can improve your overall tax efficiency.
Annual Investment allowance
Although the AIA limit has varied in previous years, it remained at £200,000 from 1 January 2016 until the end of 2018, when it increased to £1 million for a period of two years.
A claim made through AIA provides the full value paid for any eligible asset up to the AIA limit. The amount claimed may then be deducted from your taxable profit.
General and special rate equipment can be claimed for under AIA and there are also a number of green initiatives which may be eligible for relief.
Business assets that are not eligible for claiming under AIA include:
- assets already in your possession that you later used in your business
- assets that were given to you or to your business, rather than being purchased by you or your business
The above items should generally be claimed for through WDA instead.
To work out the amount you can claim through AIA, total up the cost of any eligible purchases made within that tax year. If your total is less than the AIA limit, you can in effect claim 100% of the value of your purchased assets for that year, as long as they are eligible for AIA.
Where your total is more than the AIA limit, and the purchased assets are eligible, it may be possible to claim the excess through a
Writing Down allowance.
Writing Down allowance
Where your capital allowance claim exceeds the AIA limit, you may be able to claim for this extra amount through WDA.
Under WDA, a percentage of the cost of eligible business purchases can be claimed for. The specific percentage will depend on the asset itself.
When making a WDA claim, it is necessary to group the purchased assets into pools of items that bear the same percentage claim rate.
The resulting amounts for each pool may then be deducted from profits declared on your tax return for that year.
The remaining amount in each pool will form the starting balance for the following tax year or accounting period.
The pool rates are:
- main pool – 18%
- special rate pool – 8%
- single asset pool – 18% or 8% depending on the specific asset
Where a purchased asset is not suitable for AIA, WDA may be used for certain items, including personal belongings that are later used in a business, gifts and cars.
Claiming for the purchase of a car
The type of claim you can make and the corresponding rate will depend on when the car was purchased and the car’s CO2 emissions.
Cars purchased between April 2015 and 1 April 2018
- Electric car or CO2 emissions are 75g/km or lower – 100% – First year allowances
- Electric car or CO2 emissions are 95g/km or lower – 100% – First year allowances
- Electric car or CO2 emissions are 110g/km or lower – 18% – First year allowances
- CO2 emissions between over 75g/km and 130g/km – 18% – Writing down allowance
- CO2 emissions between over 110g/km and 160g/km – 18% – Writing down allowance
- CO2 emissions over 130g/km – 8% – Writing down allowance
- CO2 emissions over 160g/km – 8% – Writing down allowance
After 1 April 2018, it is the intention of the British government is to reduce emission thresholds to 50g/km and 110g/km.
Small Pools allowance
In certain circumstances, it may prove more tax efficient to make a Small Pools allowance claim, rather than WDA.
Where your total claim for purchased business assets exceeds the AIA limit, and the value of a pool, prior to the WDA calculation, is below £1,000 for a tax year, it may be possible to make a Small Pools allowance claim instead of a WDA claim. The balance of the small pool will then be written off.
First-year allowance (FYA)
Use FYA to claim for the full cost of an eligible asset during the first year of its purchase. The value of any FYA claim will not be deducted from your AIA annual limit.
Eligible assets to be claimed under FYA include:
- certain cars which have low CO2 emissions
- new zero-emission goods vehicles
- energy saving equipment that appears on the energy technology product list
- plant and machinery used by gas refuelling stations
- water saving equipment that appears on the water efficient technologies product list
- gas, biogas and hydrogen refuelling equipment
Assets that cannot be claimed under FYA include:
- items given to you or the business
- items that you already owned before using them in the business
- items that were not new when they were first used in the business
- items purchased for the purpose of renting out
- items purchased for the purpose of being used in a rental residential property
Any first year allowance entitlement not used in a tax year, may be claimed in the following tax year through WDA.
If you claim for an asset and then later cease to use that asset in the business or dispose of the asset, it may be necessary to make adjustments to your capital allowances.
Where a loss is incurred in relation to the asset, it may be possible to deduct this from your taxable profit. This is known as a ‘balancing allowance’. To calculate a balancing allowance, deduct the sale price or market value from the purchase price, less the capital allowance claimed in the year before.
Where the sale price or market value is more than the value of the pool, this will result in a ‘balancing charge’, resulting in an additional amount that must be added to your taxable profits.
Other capital allowances
Besides transport vehicles, machinery or equipment, it is possible to make other capital allowance claims for:
- the renovation of business premises in disadvantaged areas of the country
- the extraction of minerals
- research and development
- industrial intellectual property
- the process of dredging
through schemes such as Business Premises Renovation Allowance (BPRA), Research and Development allowance (RDA), and Patent allowance.
Capital allowances – what you need to know
The tax legislation that governs capital allowances is detailed, complex and regularly updated. It is important, therefore, to maintain an ongoing awareness of exactly which capital allowances are applicable to your purchases and tax situation.