Capital Allowances

Introduction 

Capital Allowances, how do they work when you are running your own company?

First of all, Capital Allowances is an accounting term for allowances that you can claim on fixed assets. What’s more, you will claim these through your business tax workings.

The UK government sets the rates and types of Capital Allowances. Please note they announce any changes to these in the UK annual budgets, the last one of which was the March 2020 Budget.

As a result of claiming for Capital Allowances, they will help reduce your business profit that is subject to Corporation Tax (CT). In turn, they then help to reduce your annual CT charge.

Capital Allowances, how do they work? 

Please note, `normal’ business expenses and day to day running costs are fully deductible against profit. The expenses also need to `wholly and exclusively’ for business purposes.

Another term for fixed assets is `capital expenditure.’ The assets have a value, and they show in the Balance Sheet in your company accounts. Furthermore, a depreciation charge will apply to fixed assets, and this, in turn, will reduce your company profits. The depreciation is the estimated loss of value of the asset for the year in question and this also reduces the fixed asset value in the Balance Sheet.

In your business tax computations, depreciation is not an allowable expense. Therefore, you add this back on to the profit. Capital Allowances (CA) are then deducted and claimed for instead.

To sum up, CA allows a business to claim tax relief on business assets. The allowances may also apply over several accounting years, depending on the type of asset.

The types of allowances that are available 

When we look at Capital Allowances, how do they work, the types of allowances that are available to UK companies are:

  • First Year Allowance (FYA). FYA is available on certain types of energy-efficient plant, machinery, and certain cars (electric/hybrid cars up to 50g per km). The allowance is 100% in the year that the business buys the asset. 
  • Annual Investment Allowance (AIA). AIA excludes cars and expenditure that already qualifies for FYA. Again, the allowance is 100% up to a maximum of £1 million (previously it was £200,000). The £1 million figure remains in place until 31 December 2020, thus giving businesses two years of the increased limit. It will change to £200,000 from 1 January 2021. 
  • Writing Down Allowance (WDA). WDA is available for expenditure not qualifying for AIA or FYA. WDA is available for other plant and machinery in a `pool.’ The allowance applies at 18% 
  • Special rate allowances. This allowance is available for long-life assets, integral features of buildings, and cars over 110g per km (CO2). The allowance applies at 6% (previously, this was 8%). 
  • Structures and Buildings Allowance (SBA). The allowance applies at 3% on a `straight-line’ basis

To sum up, if you are running your own contracting company, you will be able to claim for computer-related equipment and office related equipment under AIA. What’s more, with the allowance currently set at £1 million, contractors will be able to receive 100% tax relief against any computer or office equipment that their business buys. 

From 1 April 2021 until 31 March 2023, companies investing in qualifying new plant and machinery assets will be able to claim:

  • a 130% super-deduction capital allowance on qualifying plant and machinery investments;
  • a 50% first-year allowance for qualifying special rate assets.

Please note, as you can see below, when we look at Capital Allowances, how do they work, the rules when you claim for Capital Allowances on company cars are quite complex. I have set these out as best as I can. 

If you have a company car, you cannot claim AIA against this.

How First Year Allowances work 

If your car is an energy-efficient vehicle such as an electric or hybrid car you can claim FYA under the following bases:   

Cars bought between April 2009 and April 2013

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

Cars bought between April 2013 and April 2015

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

Cars bought between April 2015 and April 2018

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

Cars bought from April 2018

New and unused, CO2 emissions are 50g per km or less (or the car is electric) 

When we take a look at Capital Allowances, how do they work, if your company car is not an energy-efficient vehicle, the rate you can claim depends on the CO2 emissions.

How writing down allowances work   

Importantly, the capital allowances that are available depend on the date you bought the car. Therefore, you can claim WDA under the following bases: 

Cars bought between April 2009 and April 2013 

New and unused, CO2 emissions are between 110g per km and 160g per km -main rate allowances

Second hand, CO2 emissions are 160g/km or less (or the car is electric) -main rate allowances

New or second hand, CO2 emissions above 160g per km -special rate allowances 

Cars bought between April 2013 and April 2015 

New and unused, CO2 emissions are between 95g per km and 130g per km -main rate allowances

Second hand, CO2 emissions are 130g per km or less (or the car is electric) -main rate allowances

New or second hand, CO2 emissions are above 130g per km -special rate allowances 

Cars bought between April 2015 and April 2018 

New and unused, CO2 emissions are between 75g per km and 130g per km -main rate allowances

Second hand, CO2 emissions are 130g per km or less (or the car is electric) -main rate allowances

New or second hand, CO2 emissions are above 130g per km -special rate allowances 

Cars bought from April 2018 

New and unused, CO2 emissions are between 50g per km and 110g per km -main rate allowances

Second hand, CO2 emissions are 110g per km or less (or the car is electric) -main rate allowances

New or second hand, CO2 emissions are above 110g per km -special rate allowance 

Buying a company car in the near future   

If you are buying a company car now or soon, the best choices available are:     

  • New and unused, CO2 emissions are 50g per km or less (or the car is electric) –first-year allowances 
  • New and unused, CO2 emissions are between 50g per km and 110g per km -main rate allowances 
  • Second hand, CO2 emissions are 110g per km or less (or the car is electric) -main rate allowances 
  • New or second hand, CO2 emissions are above 110g per km -special rate allowances

In conclusion, when we look at Capital Allowances, how do they work, as you can see, these rules are not easy to follow. Therefore, if you have any questions, please take the time to speak with your accountant.

Final thoughts

As a final thought, when we look at Capital Allowances, how do they work, this is are quite a complex area. The rules around these can also change each year. What’s more, if you have a good accountant who knows what they are doing, you can let them look after all of this for you. Then you do not have to worry or think about this! Your accountant will work out the Capital Allowances when they prepare your company accounts each year.

Also, it is good for you as a contractor to know what rates are available. In turn, you can then consider what the tax effects will be for any capital outlay that you make. Again, if you are not sure, you should take the time to discuss all of this with your accountant.

Link to Contractor Advice UK group on 

LinkedIn    https://www.linkedin.com/groups/4660081/

Published On: March 19th, 2021 / Categories: Accounting / Tags: /

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