An Introduction to Capital Allowances

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    Small Businesses Encouraged to Make Use of Tax Breaks on Asset Investment

    Ensuring that your small business is as successful as possible means exploring all the tax relief options open to it to maximise profitability, but confusion and lack of knowledge around the subject of capital allowances discourages many a business owner from utilising this valuable method of tax efficiency. Tax preparation specialist David Redfern, director of DSR Tax Claims Ltd has provided his guidance for small businesses, partnerships and sole traders who wish to employ this avenue of tax relief.

    Capital allowances are a method by which businesses can treat their business assets in order to maximise the tax efficiencies of their business. Business assets refer to larger or more expensive items of business expenditure, such as computer equipment, plant and machinery and business vehicles. Redfern stated “In order to be eligible for capital allowances, such assets have to be solely for business use – personal and non-business usage isn’t permitted under HMRC regulations. In addition to physical assets such as machinery, non-physical assets such as patents and intellectual property can also be subject to capital allowances as assets of your business as can renovations and improvements to business property, although routine maintenance is not allowable”. In order to be able to claim capital allowances, a business or sole trader or partnership must be using traditional accounting methods. Sole traders and partnerships which use cash-basis accounting cannot utilise capital allowances although they can deduct such business purchases as a business expense.

    The Annual Investment Allowance (AIA) allows businesses to deduct the entire value of a business asset from profits before tax. In the October 2018 budget, AIA was temporarily increased for two years to £1m per year from 1st January 2019. This increase, from the previous limit of £200,000 is intended to stimulate business investment. Redfern explained “Businesses can claim AIA on most plant and machinery purchases with the exception of cars, which would be subject to writing down allowances instead. Items which were previously owned personally before being given to the business are also not eligible for AIA”. AIA can only be claimed in the accounting period in which the asset was purchases and businesses receive a new allowance for each accounting period. AIA may not be claimed in a business’s final accounting period in order to prevent abuse of the allowance.

    For assets which are not eligible for AIA, there are other allowances such as first year allowances and writing down allowances which can also allow a business to offset some or all of its business asset expenditure against profits before tax. First year allowances are applicable to certain energy efficient equipment such as water saving equipment or zero emission goods vehicles, as long as they are new. Certain company cars with low CO2 emissions are also eligible for this allowance. These assets do not count towards the AIA limit and the allowance can be claimed alongside AIA. Redfern stated “For those assets which aren’t eligible for either AIA or first year allowances, you might be able to claim writing down allowances where you deduct a percentage of its value rather than the full value. You can also claim writing down allowances on amounts over the AIA limit”.

    Limited companies will claim capital allowances through their Company Tax Return, while sole traders and partnerships which use traditional accounting methods can claim this through their Self Assessment Tax returns. Partnerships must be standard partnerships, not partnerships where one partner is a limited company.

    DSR Tax Claims Ltd