What exactly do you mean by Capital Allowances? How can I benefit from Capital Allowances?

CAPITAL ALLOWANCES

 

(This is a brief summary, and should not be relied on instead of seeking professional advice)

 

Overview

You can claim capital allowances when you buy assets that you keep to use in your business, eg:

 ·         equipment

 ·         machinery

·         business vehicles, eg cars, vans or lorries

 

These are known as plant and machinery.

You can deduct some or all of the value of the item from your profits before you pay tax.

 

What you can claim for

You can claim capital allowances on capital items that you use in your business - these are known as ‘plant and machinery’.

In most cases you can deduct the full cost of these items from your profits before tax - using annual investment allowance (AIA).

 

What doesn’t count as plant and machinery

You can’t claim capital allowances on:

·         things you lease - you must own them

·         buildings, including doors, gates, shutters, mains water and gas systems

·         land and structures, eg bridges, roads, docks

·         items used only for business entertainment, eg a yacht or karaoke machine

 

What counts as plant and machinery

Plant and machinery includes:

·         items that you keep to use in your business, including cars

·         costs of demolishing plant and machinery

·         parts of a building considered integral, known as ‘integral features’

·         some fixtures, eg fitted kitchens or bathroom suites

·         alterations to a building to install other plant and machinery - this doesn’t include repairs

Claim repairs as business expenses if you’re a sole trader or partner - deduct from your profits as a business cost if you’re a limited company.

 

Integral features

Integral features are:

·         lifts, escalators and moving walkways

·         space and water heating systems

·         air-conditioning and air cooling systems

·         hot and cold water systems (but not toilet and kitchen facilities)

·         electrical systems, including lighting systems

·         external solar shading

Fixtures

You can claim for fixtures, eg:

·         fitted kitchens

·         bathroom suites

·         fire alarm and CCTV systems

You can claim if you rent or own the building, but only the person who bought the item can claim.

 

When you buy a building from a previous business owner you can only claim for integral features and fixtures that they claimed for.

 

You must agree the value of the fixtures with the seller. If you don’t you can’t claim for them. Agreeing the value also means the person selling the assets can account correctly for them.

 

If you let residential property

 

You can only claim for items in residential property if either:

·         you run a furnished holiday lettings business

·         the item is in the common parts of a residential building, eg a table in the hallway of a block of flats

 

Overview - Annual Investment Allowance

You can deduct the full value of an item that qualifies for annual investment allowance (AIA) from your profits before tax.

If you sell the item after claiming AIA you may need to pay tax.

 

What you can claim on

You can claim AIA on most plant and machinery up to the AIA amount.

 

What you can’t claim on

You can’t claim AIA on:

  • cars
  • items you owned for another reason before you started using them in your business
  • items given to you or your business

Instead you can claim a different type of capital allowances called “writing down allowances” - See Below.

 

Business cars

You can claim capital allowances on cars you buy and use in your business. This means you can deduct part of the value from your profits before you pay tax.

Use writing down allowances to work out what you can claim – [remember - cars don’t qualify for annual investment allowance (AIA)].

 

The AIA amount

The AIA amount is £200,000. This is for 12-month periods from 1 January 2016.

 

Changes to the AIA

Between April 2008 and January 2016 the AIA amount changed several times.

Below are the figures from 2014.

 

If the AIA changed in the period you’re claiming for, you need to adjust the amount you can claim.

Sole traders/partners Limited companies AIA
From 1 January 2016 From 1 January 2016 £200,000
6 April 2014 - 31 December 2015 1 April 2014 - 31 December 2015 £500,000

 

You get a new allowance for each accounting period.

 

If your accounting period is more or less than 12 months

Adjust your AIA if your accounting period is more or less than 12 months.

 

Example: If your accounting period is 9 months the AIA will be 9/12 x £200,000 = £150,000.

You may also need to take into account changes to the AIA in that time.

The rules are different if your accounting period is longer than 18 months or you have a gap or overlap between accounting periods.

 

When you can claim

You can only claim AIA in the period you bought the item.

The date you bought it is:

  • when you signed the contract, if payment is due within less than 4 months
  • when payment’s due, if it’s due more than 4 months later

If you buy something under a hire purchase contract you can claim for the payments you haven’t made yet when you start using the item. You can’t claim on the interest payments.

If your business closes, you can’t claim AIA for items bought in the final accounting period.

 

If you don’t want to claim the full cost

If you don’t want to claim the full cost, eg you have low profits, you can claim:

·         writing down allowances instead

·         part of the cost as AIA and part as writing down allowances

 

Items you also use outside your business

You can’t claim the full value of items you also use outside your business if you’re a sole trader or partner. Reduce the capital allowances you claim by the amount you use the asset outside your business.

Example: You buy a laptop for £600. You use it outside your business for half of the time. The amount of capital allowances you can claim is reduced by 50%.

 

If you spend more than the AIA amount

Claim writing down allowances on any amount above the AIA. If a single item takes you above the AIA amount you can split the value between the types of allowance.

 

First year allowances

If you buy an asset that qualifies for first year allowances you can deduct the full cost from your profits before tax.

 

What qualifies

You can claim ‘enhanced capital allowances’ (a type of first year allowances) for the following energy and water efficient equipment:

·         some cars with low CO2 emissions

·         energy saving equipment that’s on the energy technology product list, eg certain motors

·         water saving equipment that’s on the water efficient technologies product list, eg meters, efficient toilets and taps

·         plant and machinery for gas refuelling stations, eg storage tanks, pumps

·         gas, biogas and hydrogen refuelling equipment

·         new zero-emission goods vehicles

You can’t normally claim on items your business buys to lease to other people or for use within a home you let out.

 

Business cars

You can claim capital allowances on cars you buy and use in your business. This means you can deduct part of the value from your profits before you pay tax.

Use writing down allowances to work out what you can claim - cars don’t qualify for annual investment allowance (AIA).

 

Sole traders and partners

 

If you’re a sole trader or a partner you can claim simplified mileage expenses on business vehicles instead - as long as you haven’t already claimed for them in another way.

 

Employees

 

If you’re an employee you can’t claim capital allowances for cars, motorbikes and bicycles you use for work, but you may be able to claim for business mileage and fuel costs.

 

What counts as a car

For capital allowances a car is a type of vehicle that:

·         is suitable for private use - this includes motorhomes

·         most people use privately

·         wasn’t built for transporting goods

 

What doesn’t count

 

Because they don’t count as cars you can claim AIA on:

·         motorcycles - apart from those bought before 6 April 2009

·         lorries, vans and trucks

 

Using cars outside your business

If you’re a sole trader or partner and you also use your car outside your business, calculate how much you can claim based on the amount of business use.

If your business provides a car for an employee or director you can claim capital allowances on the full cost. You may need to report it as a benefit if they use it personally.

 

 

Writing down allowances

When you buy business assets you can usually deduct the full value from your profits before tax using annual investment allowance (AIA).

Use writing down allowances instead if:

  • you’ve already claimed AIA on items worth a total of more than the AIA amount
  • the item doesn’t qualify for AIA (for example, cars, gifts or things you owned before you used them in your business)

Writing down allowances is the term used when you deduct a percentage of the value of an item from your profits each year.

The percentage you deduct depends on the item. For business cars the rate depends on their CO2 emissions.

 

Rates and Pools

If you’re claiming writing down allowances, group items into pools depending on which rate they qualify for.

The 3 types of pool are the:

 ·         main pool with a rate of 18%

 ·         special rate pool with a rate of 8%

·         single asset pools with a rate of 18% or 8% depending on the item

 

Main Rate Pool

Add the value of all ‘plant and machinery’ you’ve bought to the main rate pool, unless they’re in:

·         the special rate pool

·         a single asset pool (for example, because you have chosen to treat them as ‘short life’ assets or you’ve used them outside your business)

 

Special Rate Pool

You have to claim a lower rate of 8% on:

·         parts of a building considered integral - known as ‘integral features’

·         items with a long life

·         thermal insulation of buildings

·         cars with CO2 emissions of more than 130g/km

You can claim AIA on these items apart from cars. Only claim writing down allowances at 8% if you’ve already claimed AIA on items worth a total of more than the AIA amount.

 

Integral features

Integral features are:

  • lifts, escalators and moving walkways
  • space and water heating systems
  • air-conditioning and air cooling systems
  • hot and cold water systems (but not toilet and kitchen facilities)
  • electrical systems, including lighting systems
  • external solar shading

 

·         Buildings themselves don’t qualify for capital allowances.

Items with a long life

These are items with a useful life of at least 25 years from when they were new.

 

Single asset pools

You might need to create one or more separate pools for single assets that:

·         have a short life (for assets you aren’t going to keep for a long time)

·         you use outside your business if you’re a sole trader or a partner

 

Short life assets

It’s up to you to decide whether you want to treat something as a short life asset. You can’t include:

·         cars

·         items you also use outside your business

·         special rate items

Large numbers of very similar items can be pooled together (for example, crockery in a restaurant).

The pool ends when you sell the asset. This means you can claim the capital allowances over a shorter period.

 

How to claim

When you’ve worked out your capital allowances, claim on your:

  • Self Assessment tax return if you’re a sole trader
  • partnership tax return if you’re a partner
  • Company Tax Return if you’re a limited company - you must include a separate capital allowances calculation

 

The amount you can claim is deducted from your profits.

When you can claim

You must claim in the accounting period you bought the item if you want to claim the full value under:

  • annual investment allowance
  • first year allowances

If you don’t want to claim the full value you can claim part of it using writing down allowances. You can do this at any time as long as you still own the item.

When you bought it

The date you bought it is:

  • when you signed the contract, if payment is due within less than 4 months
  • when payment’s due, if it’s due more than 4 months later

If you buy something under a hire purchase contract you can claim for the payments you haven’t made yet when you start using the item. You can’t claim on the interest payments.

 

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