Capital Allowances and annual investment allowance

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Introduction -Capital Allowance rates 

Capital Allowances, which include the Annual Investment Allowance, are types of allowances that a UK business can claim. Notably, a business will go about claiming capital allowances when it prepares its year-end accounts and company tax return. The Capital Allowance rates vary between different types of assets and these can also change from year to year in the government’s annual Budgets or Spring Statements. 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 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 you can claim, these will be deducted from your profit. In turn, it will reduce the tax your business needs to pay.

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

The UK government sets the rates and types of Capital Allowances. Please note that they announce any changes to these in the UK annual budgets, the last of which was the March 2022 Spring Statement.

Key to note, when you claim for Capital Allowances (CA) on any capital expenditure incurred during the accounting period, this will help reduce your limited company profit subject to Corporation Tax (CT). As a result, the CA allowances help to reduce your company’s annual Corporation Tax charge.

Capital Allowances, how do they work? 

Please note that `normal’ business expenses and day-to-day running costs are fully deductible against profit. Key to mention, these expenses must also be `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 company accounts. In turn, this will reduce your company’s profits. Therefore, depreciation is the estimated asset value loss for the year in question. In addition, it will reduce the fixed asset value that is on 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 deducted and claimed instead, resulting in your profit before tax. Key to note, this taxable 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.

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

The types of Capital Allowance rates that are available 

When we look at Capital Allowances and how they work, different types of allowances 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 that 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 that the allowance is 100% in the year when 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 that this new limit will now be in effect from 31 December 2021 until March 2023, thus giving businesses additional time for the increased limit.
  • The Writing Down Allowance (WDA). Please note that the WDA is available for expenditures that do not qualify for AIA or FYA. Moreover, WDA is available for other plants 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 is 6% (previously, this was 8%).
  • The Structures and Buildings Allowance (SBA). Please note that the allowance that applies for SBA is at 3% on a `straight-line’ basis.

Annual Investment Allowance example 

Peter is a limited company contractor and his year-end is 31 December 2022. During the year his company purchases a new computer with various equipment costing £1,800. As this is within the annual limit the cost of the computer is fully deductible against his company’s taxable profit. Therefore, his company will make a company tax saving of £1,800 x 19% = £342.

A new allowance

The new Super Deduction Capital Allowance was announced during the Budget on 3 March 2021. This new allowance is available from 1 April 2021 until 31 March 2023 and it allows companies who invest in qualifying new plant and machinery assets to claim a Capital Allowances Super Deduction. Let’s clarify further how this works:

  • A 130% Capital Allowances Super Deduction on certain qualifying expenditure. These business assets include plant and machinery investments. Please note, when claiming for the Super Deduction, this 130% first-year allowance is claimed in the year of asset purchase. To qualify for the Super Deduction, the expenditure must be on new assets; notably, second-hand assets do not qualify.
  • A 50% first-year allowance for qualifying special rate assets.

To sum up, if you are running your own contracting company, previously you were able to claim computer-related equipment and office-related equipment under the Annual Investment Allowance. However now, until 31 March 2023, you can now claim for the Capital Allowances Super Deduction. After 31 March 2023, this will revert to the Annual Investment Allowance again. With this in mind, as the Annual Investment Allowance is currently set at £1 million, contractors can receive 100% tax relief against any computer or office equipment their business buys.

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

Capital Allowance rates -company cars

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

  • The total value of the car in the year of purchase.
  • 18% of the car’s value (main rate pool allowances).
  • 6% of the car’s value (special rate pool allowances). 

Capital Allowance rates -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 look at Capital Allowances and how they work, the rate you can claim depends on the CO2 emissions if your company car is not an energy-efficient vehicle.

Capital Allowance rates -how Writing Down Allowances work   

The Capital Allowances 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 between April 2018 and April 2021 

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

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

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

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

Second-hand, CO2 emissions are 50g/km or less (or the 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 new and existing assets. Please note that 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 that 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’s taxable profits. On the other hand, a balancing charge will increase 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. It is important to note that your accountant will work out the Capital Allowances when preparing your company accounts each year. In recent years, the Annual Investment Allowance has allowed many contractors and small business owners to reclaim a 100% tax deduction on purchasing new company equipment.

Finally, it is good for you as a contractor to know the available rates. In turn, you can then consider the tax effects for any capital outlay 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: August 1st, 2022 / Categories: Accounting /

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