Capital allowances serve as a critical mechanism for businesses to mitigate the financial burden of buying assets for operational use.
These allowances enable companies to write off the cost of assets against their taxable income, thereby reducing their overall tax liability.
This article aims to provide an in-depth understanding of the intricacies involved in capital allowances and how your business can use them to its advantage.
Types of capital allowances
- Annual investment allowance (AIA): This is the most straightforward form of capital allowance, allowing businesses to deduct the full value of qualifying assets from their profits in the year of purchase. The AIA limit is subject to periodic changes, so it’s crucial to stay updated on the current threshold.
- Writing down allowances (WDA): For assets that don’t qualify for AIA or exceed the AIA limit, WDAs offer a way to write off a percentage of the asset’s value each year. The percentage varies depending on the asset category, such as plant and machinery or integral features.
- First-year allowances (FYA): Certain energy-efficient or environmentally friendly assets may qualify for FYAs, allowing for a 100 per cent deduction in the first year.
- Full expensing: This scheme, introduced in 2023, allows companies to write off the cost of investment in one go. Under full expensing, for every pound a company invests, their taxes are cut by up to 25p as they are eligible to claim 100 per cent capital allowances.
Generally, assets must be ‘plant or machinery’ used for business purposes. This includes everything from office furniture to industrial machinery, but buildings and land typically do not qualify.
The process of claiming capital allowances involves several steps:
- Asset identification: Determine which assets qualify for capital allowances and under which category they fall.
- Documentation: Maintain meticulous records, including invoices and proof of usage, to substantiate your claim.
- Calculation: Apply the appropriate rate to calculate the allowance. This could be 100 per cent under AIA or a specific percentage under WDA.
- Submission: Include the calculated allowances in your Corporation Tax Return or Income Tax Self-Assessment form.
Points to consider
- Timing: The timing of asset purchases can significantly impact the amount of capital allowance you can claim. For instance, buying assets just before the end of the tax year can accelerate tax relief.
- Qualifying expenditure: Full expensing requires the assets to be new and unused.
- Pooling: Assets that don’t qualify for AIA or FYA can be pooled together to claim WDAs. However, once an asset enters a pool, it cannot be moved.
Understanding the nuances of capital allowances can be complex but is essential for optimising tax efficiency.
Proper planning and consultation with experts can help you navigate this intricate landscape effectively and increase your business’s profitability by reducing tax liabilities.
Speak to one of our experts to discuss the above further.