At McDade Roberts Accountants in Preston, Longridge and Bamber Bridge we get asked a lot of questions about capital allowances. Below is a quick guide to capital allowance rules but feel free to call us on 01772 717110 if you would like to know more.
What Are Capital Allowances?
The cost of purchasing capital equipment in a business is not a revenue tax deductible expense however, tax relief is available on certain capital expenditure in the form of capital allowances.
Capital allowances are not generally affected by the way in which the business pays for the purchase. So where an asset is acquired on hire purchase (HP), allowances are generally given as though there were an outright cash purchase and subsequent instalments of capital are ignored. However, finance leases are generally denied capital allowances. Instead the accounts depreciation is usually allowable as a tax-deductible expense.
What Can Be Included As A Capital Allowance?
Plant and Machinery
Capital Allowances are available on plant and machinery purchases including machines, equipment, furniture, certain fixtures, computers, cars, vans and similar equipment you use in your business.
Acquisitions
The Annual Investment Allowance (AIA) provides a 100% deduction for the cost of most plant and machinery (not cars) purchased by a business up to an annual limit and is available to most businesses. Where businesses spend more than the annual limit, any additional qualifying expenditure generally attracts an annual writing down allowance (WDA) of only 18% depending on the type of asset.
The maximum amount of the AIA depends on the date of the accounting period and the date of expenditure. This is currently £1 million but will reduce to £200,000 from 1 April 2023. Complex rules apply to accounting periods straddling 1 April 2023 so please speak to us.
Where purchases exceed the AIA, a WDA is due on any excess in the same period. Cars are not eligible for the AIA, so will only benefit from the WDA (see special rules for cars).
Please contact us before capital expenditure is incurred in a current accounting period, so that we can help you to maximise the AIA available.
Pooling Of Expenditure And Allowances Due
- Expenditure on all items of plant and machinery are pooled rather than each item being dealt with separately.
- A writing down allowance (WDA) on the main rate pool of 18% is available on any expenditure incurred in the current period not covered by the AIA or not eligible for AIA as well as on any balance of expenditure remaining from earlier periods.
- Certain expenditure on buildings fixtures, known as integral features (eg lighting, air conditioning, heating, etc) is only eligible for a 6% WDA so is allocated to a separate 'special rate pool', though integral features do qualify for the AIA.
- When an asset is sold, the sale proceeds (or original cost if lower) are brought into the relevant pool. If the proceeds exceed the value in the pool, the difference is treated as additional taxable profit and referred to as a balancing charge.
Structures and Buildings Allowance
Expenditure incurred on business-related buildings and structures will attract an annual 3% writing down allowance on a straight-line basis. This allowance is designed to encourage investment in the construction of new structures and buildings that are intended for commercial use, the necessary works to bring them into existence and the improvement of existing structures and buildings, including the cost of converting existing premises for use in a qualifying activity. Neither land nor dwellings are eligible for relief. No relief is available for work spaces within domestic settings, such as home offices.
Super-Deduction For Companies
Between 1 April 2021 and 31 March 2023, incorporated companies investing in qualifying new plant and machinery will benefit from new first year capital allowances.
A company will be allowed to claim:
- A super-deduction providing allowances of 130% on most new plant and machinery investments that ordinarily qualify for 18% main rate writing down allowances.
- A first year allowance of 50% on most new plant and machinery investments that ordinarily qualify for 6% special rate writing down allowances.
Capital Allowance Rules For Cars
Other vehicles are treated as general pool plant and machinery but cars are not eligible for the AIA.
The following rules apply:
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Type of car purchase
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Allocate
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Allowance
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New zero emission car
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Main rate pool
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100% allowance
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Not exceeding 50 g/km CO2 emissions
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Main rate pool
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18% WDA
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Exceeding 50 g/km CO2 emissions
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Special rate pool
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6% WDA
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Non-Business Use Element
Cars and other business assets that are used partly for private purposes, by the proprietor of the business are allocated to a single asset pool irrespective of costs or emissions to enable the private use adjustment to be made. Private use of assets by employees does not require any restriction of the capital allowances.
The allowances are computed in the normal way so can in theory now attract the 100% AIA or the relevant writing down allowance. However, only the business use proportion is allowed for tax purposes. This means that the purchase of a new zero emission car which costs £15,000 with 80% business use will attract an allowance of £12,000 (£15,000 x 100% x 80%) when acquired.
On the disposal of a private use element car, any proceeds of sale (or cost if lower) are deducted from any unrelieved expenditure in the single asset pool. Any shortfall can be claimed as an additional one off allowance but is restricted to the business use element only. Similarly any excess is treated as a taxable profit but only the business related element.
Capital Allowance Boost For Low-Carbon Transport
A 100% First Year Allowance (FYA) is currently available for businesses purchasing new zero-emission goods vehicles, gas refueling equipment and electric charge-point equipment.
Capital Allowance Short Life Assets
For equipment you intend to keep only a short time, you can choose to keep such assets outside the normal pool. The allowances on them are calculated separately and on sale if the proceeds are less than the balance of expenditure remaining, the difference is given as a further capital allowance. This election is not available for cars or integral features.
The asset is transferred into the pool if it is not disposed of by the eighth anniversary of the end of the period in which it was acquired.
Capital Allowance Long Life Assets
These are assets with an expected useful life in excess of 25 years. These assets are combined with integral features in the special rate pool.
There are various exclusions including cars and the rules only apply to businesses spending at least £100,000 per annum on such assets so smaller businesses are unaffected.
Other Capital Allowance Assets
Please contact us for specific advice on areas such as qualifying expenditure in respect of enterprise zones and research and development.
Captial Allowance Claims
Unincorporated businesses and companies must both make claims for capital allowances through tax returns. Claims may be restricted where it is not desirable to claim the full amount available - this may be to avoid other allowances or reliefs being wasted.
For unincorporated businesses the claim must normally be made within 12 months after the 31 January filing deadline for the relevant return. For companies the claim must normally be made within two years of the end of the accounting period.
How McDade Roberts Accountants Can Help
Confused? Don't worry. The rules for capital allowances are complex and we can help by computing the allowances available to your business, ensuring that the most advantageous claims are made and by advising on matters such as the timing of purchases and sales of capital assets. Please contact us if you would like further advice.