Capital allowances allow you to claim tax relief on assets you buy for your business. The value of these items can be offset against your company’s profits over time. So how do capital allowances work in practice?
Day-to-day expenses vs. capital expenditure
The day-to-day expenses you incur running your business are typically offset against your company’s profits and can be claimed without delay as expenses.
However, not all costs are ‘allowable’ as day-to-day expenses for tax purposes – typically larger ‘capital’ items. They are accounted for differently.
As the cost of depreciation is not allowable for tax purposes, HMRC provides a system of capital allowances to help businesses write off the value of assets over time in a uniform way.
This may be over several accounting years – with a proportion of the value of each asset being written off against profits.
For the sake of completeness, this guide provides an overview of capital allowances for a range of small companies, in addition to a typical contracting business.
Tax relief on business equipment
Capital assets include items you buy to use in your business such as equipment, machinery, and cars or vans for business purposes. You can deduct part or in some cases all of the value of these items from your profits before paying tax.
For instance, if you’re starting a new contracting company, you can claim the purchase price of a new computer or server for use in your business.
If you already owned the computer before starting your company or received it as a gift, you can claim the market value of the item (what you’d expect to get if you sold it).
Other types of capital expenditure may also qualify for tax relief under one of HMRC’s capital allowance schemes.
Benefits of Capital Allowances
Apart from getting tax relief on the value of the equipment you buy for your business, capital allowances can also be an incentive to invest in your local area.
For instance, if you decide to set up and renovate your business premises in a disadvantaged part of town, you may be able to claim a tax allowance of 100%, provided the works you carry out qualify under the scheme.
Capital allowances for plant and machinery
Here are the main capital allowance schemes available to limited companies.
- Annual Investment Allowance (AIA)
- Writing Down Allowance (WDA)
- Full Expensing
- 100% First Year Allowances (FYA)
You can read more about these main schemes at GOV.UK.
Annual Investment Allowance (AIA)
Items you purchase for use in your business are defined as ‘plant and machinery’ and cover not just equipment but certain types of costs as well. You can deduct the purchase cost of qualifying items from your profits using AIA.
What is ‘plant and machinery’?
- Computers, office equipment, office furniture
- Fibre optic cabling, wiring
- Shop fittings and fixtures
- Integral features of buildings such as lifts, air-conditioning, electrical systems
- Alterations to a building to make room for new equipment
- Demolition of old or redundant plant and machinery
- Agricultural equipment
- Cars, although you have to claim for these using the Writing Down Allowance
What isn’t considered ‘plant and machinery’?
- Equipment or items that are leased
- Equipment used for business entertainment only such as a gaming machine or speedboat
- Land and structures such as gates, bridges and roads
- Buildings and features such as doors and shutters
The current AIA limit is £1m. The limit has risen significantly from £50,000 in 2008. It increased from £200,000 to £1m in January 2019. This allowance is open to all business structures, not just companies.
Claim using WDA
Most of the assets you buy for your business can be claimed for using AIA. However, you should claim using WDA instead in the following instances:
- Where the items or equipment don’t qualify for AIA. This includes cars and items you owned before you set up the company and/or gifts of items you use in the business
- Where you’ve already claimed for an item that exceeds the AIA amount.
Using WDA, you deduct a percentage of the value of the item (depreciation) from your profits for a tax year.
The percentage depends on the item, for instance, the CO2 emissions of your car.
For guidance on working out your allowance, see here.
Full Expensing
This type of allowance is similar to the AIA but without the £1m limit. It was first announced as a temporary measure, but in early 2023, was made permanent.
Under Full Expensing, your company can write off the entire cost of an asset within its first year of ownership.
You can only use FE for new assets, not assets which were switched from personal to company use, or gifted items.
First Year Allowances
This is similar to the AIA, whereby you can claim the value of an asset within a single accounting period, rather than over time.
However, the FYA only applies to a narrow group of items such as low-emission and energy-saving equipment.
Your company can claim both the AIA and FYA, as long as you don’t use both for the same expenditure.
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