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What are Capital Allowances?

Capital allowances are a way of reducing tax when your business buys a capital asset. They are considered as another business expense and thus reduce your taxable profit.

What is Writing Down Allowance?

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

When you capital asset or business eqipments 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)

Work out your capital allowances: Rates & Pools

For claiming the writing down allowances, you need to group your items into pools, depending on the rates they qualify for. There are three major types of pools:

  • Main pool: Rate of 18% Any item that does not go in the special rate pool or the ‘single assets pool’ comes under this pool.
  • Special rate pool: Rate of 8% Items with a long life- at least 25 years, like the integral features of a building- lifts, temperature control systems, electrical systems, etc., thermal insulation of a building and cars with CO2 emissions of more than 130g/km come under this pool
  • Single asset pools: Rate of 18% or 8% depending on the item Assets that have a short life like cars and the items used outside business come under this pool

Capital Allowances Rates for 2017 - 2018

Type 2017/18 to 2018/19 2015/16 to 2016/17 2014/15 2013/14 2012/13 to 2014/15 2011/12 2010/11 2009/10
Enhanced capital allowances (ECA) (energy saving and environmentally beneficial plant and machinery) 100% 100% 100% 100% 100% 100% 100% 100%

Enterprise Zone

Limit

100%

€125 million

100%

€125 million

100%

€125 million

100%

€125 million

100%

€125 million

     
Business Property Renovation - (withdrawn from April 2017)  100%  100%  100% 100% 100% 100% 100%

Flat Conversion Allowance

-  -  -

 

-

100% 100% 100% 100%

Landlord's Energy Savings Allowance

-  -  £1,500  £1,500 £1,500 £1,500 £1,500 £1,500
Annual investment allowance (AIA)  100%  100%  100%  100% 100% 100% 100%  100%
AIA annual limit   

From 1/6-April-12 £25,000

From 1-Jan-13 £250,000

From 1/6-April-14 £500,000

From 1-Jan-16 £200,000

£100,000 £100,000 £50,000
First year allowance (FYA) for expenditure not covered by ECA or AIA -  -  -  - - - - 40%
Writing down allowance (WDA) - general pool 18%  18%  18%  18% 18% 20% 20% 20%
WDA - integral features and long life assets 8%  8%  8%  8% 8% 10% 10% 10%
Small pool write off, written down balance in either or both WDA pool(s) is £1,000 or less 100%  100%  100%  100% 100% 100% 100% 100%

Motor cars

2015/16 to 2018/19

2014/15

2013/14

2012/13

To 2011/12

Type  Rate  Rate Rate Rate Rate
FYA for electric cars or if CO2 emissions are 75g/km or lower 100%        
FYA for electric cars or if CO2 emissions are 95g/km or lower   100% 100%  -  -
FYA for electric cars or if CO2 emissions are 110g/km or lower    - - 100% 100%
WDA if CO2 emissions exceed 75g/km but do not exceed 130g/km 18%        
WDA if CO2 emissions exceed 95g/km but do not exceed 130g/km   18% 18%  -  -
WDA if CO2 emissions exceed 110g/km but do not exceed 160g/km    -  - 18% 20%
WDA if CO2 emissions exceed 130g/km 8%  8% 8%  -  -
WDA if CO2 emissions exceed 160g/km    -  - 8% 10%

HMRC rules regarding Capital Allowances

HMRC needs to be notified of whatever decisions you are making when it comes to capital allowances or any other revenue related step, for that matter. Therefore, while filing your tax return, you need to let the HMRC know if you are a limited company and want to claim the capital allowances. If you plan to create a short-life asset pool, you need to notify the HMRC within two years of the end of the tax year in which you bought them.

The HMRC needs to be informed in writing of the costs and the date of acquisition of the equipment, plant or machinery if you are a sole trader or partner in a limited company. The deadline for doing so is the 31st of January of the year following the tax year in which you bought the item.

The HMRC rules might change from time to time, and it is always a good idea to get in touch with the concerned authorities to be clear on the rules regarding the Capital Allowances lest you miss the chance to claim them due to ignorance.

How to claim Capital Allowances

Once you have calculated your capital allowances, you have three ways of claiming it. They are as follows:

  • Self-assessment tax return: If you are a sole trader, you can claim the capital allowances on the self-assessment tax return form.
  • Partnership Tax Return: If you are a partner in a firm, you can claim the capital allowance while filing the partnership tax return
  • Company Tax Return: If you are claiming the capital allowances as a limited company, you will have to separately show the capital allowance calculation while filing the company tax return.

The amount that you finally calculate to be claimed under the capital allowance can be deducted from your profits.

When to claim: If you want to claim the full value of the asset bought under the annual investment allowance or the first year allowance, you must claim it in the very same accounting period that you bought the item. There is also a provision of claiming only a part of the value of the asset using the writing down allowance. This can be done at any point of time, provided you still own the asset.

Enhanced Capital Allowance and First Year Allowance

If you buy equipment that qualifies for the first year allowances, you are allowed to deduct their entire costs, i.e., 100% of their costs from the profits made in that year before filing for your taxes.

The enhanced capital allowance, a type of the first-year allowance, for energy saving and environmentally beneficial technologies is a step by the government of UK to motivate and encourage businesses to invest in energy-saving technologies. This is done not just with the intention to protect the environment but also to increase the profits of businesses by reducing their costs in the long run. As such, any plants or machinery, any equipment which clears the prerequisites, is eligible for a 100% claim on investments in the first-year tax relief. This simply implies that you can deduct the whole cost or up to the threshold limit from your profits in the same year of purchase.

What is qualifying capital expenditure for ECA (Enhanced Capital Allowance)?

The following equipment qualify for the ECA:

  • Cars with low Carbon dioxide emissions
  • Energy saving equipment on the energy technology product list
  • Water saving equipment on the water efficient technologies product list
  • Plants/machinery for gas refueling station
  • Gas, biogas and g=hydrogen refueling systems
  • Zero-emission goods vehicles

How to Claim First Year Allowance?

For claiming the first year allowance, you can file for it on your tax return. However, if you do not claim all the first year allowances you are entitled to, you can still claim part of the costs through the writing down allowances in the next accounting period.

It needs to be remembered that only new equipment qualify for the ECA. Used or second- hand equipment’ cost cannot be claimed through the enhanced capital allowances. Also, the equipments need to have been bought after 1 April 2001. It is also essential for the equipment to meet the energy saving and water conservation criteria specified by the carbon trust.

Capital allowance on cars

Any cars or vehicles used in your business are eligible for a capital allowance. Therefore, a part of the car’s value can be deducted from your profits before the payment of tax. For claiming the allowance on cars, you need to use the writing down allowance instead of the annual investment allowance as vehicles don’t qualify for the latter.

What is considered as a car?

For claiming the capital allowances, any car that is suitable for private use, including motor vehicles, and wasn’t built for transporting goods is good to go. However, motorcycles, except those bought before 6 April 2009 and lorries, vans or trucks are not entitled to capital allowances.

Can I Claim Capital Allowance on Cars Outside Business?

You can claim only a portion of the value of your car depending on how much you use it for your business. But, if your business provides a car for an employee or a director, you can claim its full costs under the capital allowance.

What are Capital Allowance Rates on Cars?

The rate of capital allowance you can claim on a car depends on the CO2 emissions of your car and the date on which you bought it. The details of these rates- authentic and updated- can be obtained from the UK government’s website.

Cars bought from April 2015

Description of car

What you can claim

New and unused, CO2 emissions are 75g/km or less (or car is electric)

First year allowances

New and unused, CO2 emissions are between 75g/km and 130g/km

Main rate allowances

Second hand, CO2 emissions are 130g/km or less (or car is electric)

Main rate allowances

New or second hand, CO2 emissions are above 130g/km

Special rate allowances

Cars bought between April 2013 and April 2015

Description of car

What you can claim

New and unused, CO2 emissions are 95g/km or less (or car is electric)

First year allowances

New and unused, CO2 emissions are between 95g/km and 130g/km

Main rate allowances

Second hand, CO2 emissions are 130g/km or less (or car is electric)

Main rate allowances

New or second hand, CO2 emissions are above 130g/km

Special rate allowances

Cars bought between April 2009 and April 2013

Description of car

What you can claim

New and unused, CO2 emissions are 110g/km or less (or car is electric)

First year allowances

New and unused, CO2 emissions are between 110g/km and 160g/km

Main rate allowances

Second hand, CO2 emissions are 160g/km or less (or car is electric)

Main rate allowances

New or second hand, CO2 emissions above 160g/km

Special rate allowances

Annual Investment Allowance

Annual Investment Allowance is a form of relief and a kind of Capita Allowance which can be claimed on almost the entire cost of plant and machinery. Any assets that your business buys can qualify for the Annual Investment Allowance provided they do not cross the limit.

What Are the Annual Invest Allowance Rates?

Date

max expenditure

From 6 April 2010 to 5 April 2012

£100,000

From 6 April 2012 to 31 December 2012

£25,000

From 1 January 2013 to 5 April 2014

£250,000

From 6 April 2014 to 31 December 2015

£500,000

From 1 January 2016

£200,000

What you can’t claim AIA (Annual Investment Allowance) on?

It is to be remembered, however, that you cannot claim AIA on cars and items initially owned for some personal use before being incorporated in the business and on items given as a gift or otherwise to your business.

AIA also can’t be claimed in case of mixed partnerships, i.e., where, one partner is a company or another partnership.

Can I Claim Annual Investment Allowance on Items I Use Outside Business?

If you use an item even outside your business, you are not allowed to claim its full value in the Annual Investment Allowance. You will have to reduce the allowance you claim by the amount you use the item for personal use.

What AIA Amount I can Claim?

If your machinery or equipment qualifies for the allowance, then you can freely deduct its entire cost from the profits made by your company before working out your taxable profit. The government has forever been changing the limit for how much annual investment allowance a business can claim in a year. The current annual investment allowance amount is set at £200,000. You need to ensure that if the AIA was different in the period that you are claiming it for, you need to make suitable adjustments in your calculations based on that amount as you get a new allowance for each accounting period.

If your accounting period is more or less than 12 months, then you need to adjust your AIA amount accordingly. For example, if your accounting period is six months, your AIA amount will be 6/12 * £200,000= £100,000.

When to claim Annual Investment Allowance?

You can claim your AIA only in the year you made the purchase. The date you bought the item is

  • The same as when you signed the contract if the payment is due in less than four months
  • The same as the payment due date if it is more than four months awa

If your business shuts down, you will not be entitled to claim AIA for the items bought in the last accounting period.

What if you spend more than your AIA amount?

The best option is to claim writing down allowances on the extra amount. If only a single item takes you above the AIA allowance, it is advisable to split its value between the two allowances.

Have more than one business or trade?

A partner or a sole trader, having more than one business or trade, usually gets a separate AIA for both the businesses. However, if both the businesses are controlled by the same person or lie in the same premises or happen to have similar activities, both the businesses get only one AIA between them. It is up to them to decide how to split it among themselves.

Self-employed capital allowances

There are items that can qualify for tax relief if you're self-employed. With help of capital allowances you can effectively lower your income tax bill, and end up paying less tax on your profits.

Self-employed: Annual Investment Allowance

For investments made in capital assets for your business, your threshold will be as per the UK government’s annual investment allowance (AIA) rules as mentioned hereinafter:

  • The annual investment allowance for 2017-18 is £200,000 which is same as year 2016-2017.

As per the HMRC rules, you can spend an amount up to £200,000 for business-related expenses which is valid for relevant period, and offset this spending against your income tax bill.

For example:

  • You spend £15,000 on items required to function your business
  • Your taxable profit for the year is £100,000
  • You only need to pay tax on £85,000 (£100,000 - £15,000).

Related Links:

Find out personal tax free allowance rates for Year 2017/18

Tax Return Deadline 2017

Helpful Links (Gov.uk) for Business about Tax & Capital Allowances

Introductory guidance

  1. Claim capital allowances
  2. Work out your capital allowances
  3. Capital allowances when you sell an asset

Further reading

  1. Annual investment allowance: limit changes during accounting periods
  2. Plant and machinery: allowances on fixtures when there's a change of ownership
  3. Business Premises Renovation Allowance (BPRA)

Manuals and helpsheets

  1. Capital Allowances Manual
  2. Capital allowances and balancing charges: HS252 Self Assessment helpsheet

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