Capital Allowances and annual investment allowance

Introduction 

Capital Allowances, which include the Annual Investment Allowance, are types of allowances that a UK business can claim for. Notably, a business will claim for these when it prepares its year end accounts and tax return. Therefore:

  • A company will claim for these through its Corporation Tax Return.
  • A self-employed person will claim for these through their Self-Assessment Tax Return.

However, how do these allowances actually work when you run your own company?

Initial thoughts

First of all, Capital Allowances is an accounting term for allowances that you can claim on your fixed assets.

The fixed assets in your business are also known as tangible assets. Therefore, these may include:

  • Plant & machinery.
  • Motor vehicles.
  • Computer equipment.
  • Office equipment.

When you or your accountant perform the calculations and arrive at the allowances that you can claim, these will be deducted from your profit. In turn, will reduce the amount of tax that your business needs to pay.

In recent times the Annual Investment Allowance has been good for contractors and small business. Key to note, there is also now a Capital Allowances Super Deduction available, following the pandemic measures.

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 2022 Spring Statement.

To sum up, CA allows a business to claim tax relief on business assets. Kindly note, the allowances may also apply over several accounting years, depending on the type of asset that you are claiming these on.

Capital Allowances, how do they work?

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

Another term that is used for fixed assets is `capital expenditure’. Notably, assets have a value and they will show in the Balance Sheet in your company accounts. Furthermore, a depreciation charge will apply to fixed assets in the actual accounts. In turn, this will reduce your company profits. Therefore, depreciation is the estimated loss of value of the asset for the year in question. In addition, it will reduce the fixed asset value that is in the Balance Sheet.

In your business tax computations, depreciation is not an allowable expense. Therefore, we add this back on to the profit. Next, Capital Allowances are then deducted and claimed for instead and this results in your taxable profit. Key to note, this profit figure is the amount that is subject to Corporation Tax as a company or income tax if you are self-employed. Notably, when reporting to HM Revenue & Customs (HMRC):

  • A company will complete a Corporation Tax return.
  • Self-employed people complete an Income Tax return.

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

The types of allowances that are available 

When we look at Capital Allowances and how they work, there are different types of allowances that are available for each type of business asset. To clarify, the allowances that are currently available to UK businesses are:

  • The First Year Allowance (FYA). Please note, the FYA is available on certain types of energy-efficient plant, machinery, and certain cars (electric/hybrid cars up to 50g per km). Kindly note, the allowance is 100% in the year that the business buys the asset.
  • Annual Investment Allowance (AIA). Notably, the AIA excludes cars and expenditure that already qualifies for FYA. Previously, the limit was £200,000 however in January 2019 it was temporarily increased to £1,000,000. Please be aware, this new limit will now be in effect until March 2023, thus giving businesses additional time for the increased limit.
  • The Writing Down Allowance (WDA). Please note, the WDA is available for expenditure that do not qualify for AIA or FYA. What’s more, WDA is available for other plant and machinery in a `pool.’ The WDA allowance that applies is 18%.
  • Special Rate allowances. Importantly, this allowance is available for long-life assets, integral features of buildings and cars over 110g per km (CO2). The Special Rate allowance that applies is 6% (previously, this was 8%).
  • The Structures and Buildings Allowance (SBA). Please note, the allowance that applies for SBA is at 3% on a `straight-line’ basis.

A new allowance

There is a new allowance that is now available from 1 April 2021 until 31 March 2023. That is to say, companies that invest in qualifying new plant and machinery assets will be able to claim for a Capital Allowances Super Deduction. To clarify, this will be:

  • A 130% Capital Allowances Super Deduction on qualifying plant and machinery investments. Please note, when claiming for the Super Deduction, the 130% allowance is claimed in the year of purchase of the asset.
  • A 50% first-year allowance for qualifying special rate assets.

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 the Annual Investment Allowance. What’s more, with the Annual Investment 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.

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

Company cars

Under Capital Allowance rules, you can claim one of the following:

  • The full value of the car as first year allowances.
  • 18% of the car’s value (main rate pool allowances).
  • 6% of the car’s value (special rate pool allowances).

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 and how 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.

Cars bought between April 2018 and April 2021 

New and unused, CO2 emissions are 50g/km or less (or car is electric) -first year allowances.

New and unused, CO2 emissions are 110g/km or less (or car is electric) -main rate allowances.

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

New or second hand, CO2 emissions are over 110g/km -special rate allowances.

Cars bought from April 2021 

New and unused, CO2 emissions are 0g/km (or car is electric) -first year allowances.

New and unused, CO2 emissions are 50g/km or less (or car is electric) -main rate allowances.

Second hand, CO2 emissions are 50g/km or less (or car is electric) -main rate allowances.

New or second hand, CO2 emissions are over 50g/km -special rate allowances.

In conclusion, when we look at Capital Allowances and how 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.

Disposing of business assets

Capital Allowances are calculated upon on new and existing assets. Please note, when a business disposes of an asset, it can usually claim a Balancing Allowance on any remaining value, after allowing for the sale proceeds. Alternatively, if the sale proceeds are more than the remaining value of the asset, the business will pay a Balancing Charge.

Therefore, when a disposal takes place, the business will report the disposal in its accounts and its Corporation Tax / Capital Allowance computations.

Please note, two examples of the above are:

Example 1 Example 2
Remaining value 2000 2000
Sale proceeds 1500 2700
Balancing allowance (charge) 500 (700)

The balancing allowance will be a deduction from a business’ taxable profits. On the other hand a balancing charge will increase the taxable profits.

Final thoughts 

As a final thought, when we look at Capital Allowances, it is quite a complex area. In addition, 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. As a result, you do not have to worry or think about this. Important to note, your accountant will work out the Capital Allowances when they prepare your company accounts each year. Key to note, the Annual Investment Allowance has allowed many contractors and small business owners to reclaim 100% tax deduction on purchase of new company equipment in recent years.

Finally, 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 in the future. Once again, if you are not sure about this, you should take the time to discuss it with your accountant.

Link to Contractor Advice UK group on

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

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

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