What capital allowances can I claim?
In this page we explain what capital allowances are and how to claim them. Remember that if you use the cash basis of accounting you will not claim capital allowances except on the purchase of cars.
Expenses you incur in your business can either be revenue (trading) expenses or capital expenditure. Normally if an item will have a lasting benefit for the business, certainly longer than a year, it will be a capital expenditure. We explain how revenue expenses are dealt with on our 'what business expenses are allowable' page.
Capital allowances are a way of obtaining tax relief on some types of capital expenditure. They are treated as another business expense and so reduce your taxable profit. As for income tax, they are given by reference to periods of account. You can find out more about accounting periods on our ‘how do I work out my taxable profits?’ page.
Matthew draws up his accounts for the year to 31 October 2015. Those accounts form his basis period for the 2015/16 tax year. Any capital expenditure in the year to 31 October 2015 is also eligible for capital allowances in the 2015/16 tax year.
No. The expenditure must be on a particular type of asset. Also generally you must own the asset on which the capital allowances are claimed. In other words if you have hired or leased the asset, capital allowances may not be claimed, but you may obtain relief on the rental costs as revenue expenditure.
There are special rules relating to assets acquired on hire purchase or finance leases. Generally these assets are treated as belonging to the person using them, even though legal ownership may not pass until a final payment is made at the end of the contract term. In order to claim capital allowances, these assets must have been brought into use. Any interest on hire purchase items is a revenue (trading) expense and not part of the capital expenditure.
They must be claimed in your tax return and they must normally be claimed by 12 months after the 31 January filing deadline for the return.
In these pages we are only going to look at plant and machinery allowances but you can find out about other types of allowances at GOV.UK.
The most common assets that you may purchase and that will qualify for capital allowances are as follows:
- Motor car
- Computer, printer, etc
- Tools, for example lawnmower, saw, etc
- Specialist machinery
The main items that will NOT attract capital allowances include the cost of buildings or property, although it is possible that part of the cost of the building might relate to integral features or to fixtures. Note that you will only be able to claim capital allowances relating to a building if it is not a residential property and the property is used for business purposes, for example if is an office or shop.
There are special allowances for energy efficient or environmentally beneficial plant and machinery.
Integral features are fittings within the building that cannot easily be removed, for example cold water systems, electrical systems, heating or ventilation systems, etc.
These are items that could be removed from a building without too much difficulty, for example shelving.
I use my car for private purposes as well as business purposes. Can I still claim capital allowances?
Yes, but you can only claim for the proportion of business use of the car – or of any other asset that has private use.
The 'normal' allowance is a writing down allowance of 18%, or a special pool writing down allowance of 8%. But there is currently a much more beneficial allowance available, the annual investment allowance.
The annual investment allowance (AIA) that provides 100% tax relief on assets qualifying as plant and machinery, subject to an annual maximum and excluding cars.
The maximum amounts have varied as follows:
|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|
You will need to apportion the rate at which the allowance is given.
If you have very high capital expenditure in an accounting period and the maximum AIA allowance changes part way through the accounting period then it is necessary to carry out a fairly complicated calculation which apportions the AIA limits to work out the maximum AIA allowance for the accounting period. For more information on this see GOV.UK.
If your expenditure is more that the AIA, then you can claim the AIA first and then claim writing down allowances on the balance.
It is a way of giving tax relief on part of the value of assets held in a pool. An example may make this clearer.
Cedric has a capital allowances pool brought forward of £24,000 before claiming allowances for 2015/16. If he has no additions or disposals of assets during that year, his claim for capital allowances would be thus:
|Written down value brought forward||£24,000|
|Writing down allowance (18%)||£4,320|
|Written down value carried forward||£19,680|
Thus Cedric can claim a writing down allowance of £4,320 and deduct that from his profits for tax purposes.
What happens to capital allowances if accounts are drawn up for a period that is not 12 months?
Writing down allowances are pro-rated to the length of the period of accounts. So if a 15 month period of accounts is prepared (say, at the start of trading), writing down allowances are 15/12 of the usual amounts.
These items only attract a writing down allowance at 8% each year. The main items in this pool will be long life assets or cars with higher carbon dioxide (CO2) emissions.
We are still in a transitional period as far as cars are concerned with the Government using capital allowances to try and encourage more environmentally friendly cars. Broadly new cars with very low CO2 emissions will attract a full 100% allowance; cars with high CO2 emissions will be placed in the special rate pool and other cars will fall into the general pool. Any car that you use privately will be placed in a separate pool as allowances will be restricted by the amount of private use you have.
If you purchase an asset but have already used up your annual investment allowance for the period or the asset does not qualify for AIA, it will need to be added to the main capital allowances pool.
Look at the example with Cedric again. Now assume that in 2015/16 he buys assets that use up his annual investment allowance, leaving £12,000 to be added to the general pool. His capital allowances computation for the general pool would be as follows:
|Written down value brought forward||£24,000|
|Writing down allowance (18%)||£6,480|
|Written down value carried forward||£29,520|
If you sell an asset in respect of which AIA has previously been claimed you deduct the sales proceeds from the balance of the pool, but you cannot deduct more than the original cost of the asset.
David has a general pool balance brought forward of £10,000. He sells a machine during the year for £1,200 (it had originally cost £3,500) and AIA had been claimed at the time in respect of this. His capital allowances computation for the general pool would be as follows:
|Written down value brough forward||£10,000|
|Writing down allowance (18%)||£1,584|
|Written down value carried forward||£7,216|
These will be assets that would ordinarily have formed part of the general pool, so the proceeds should go through the general pool. If that makes the balance on the main pool negative, then instead of a capital allowance, a balancing charge has been generated and that is an amount that is added to profits rather than being deducted from them.
Brenda has a main pool balance brought forward of £5,500 at 6 April 2015. During the year 2015/16 she sells a low emission car for £7,200. That car previously attracted a 100% allowance.
|Written down value brought forward||£5,500|
Thus Brenda has £1,700 to add to her profits for 2015/16.
This page gives you an outlined of the rules on capital allowances but we cannot cover every scenario.
HMRC also produce webinars periodically which cover capital allowances and also have e-learning packages available. For more information on these learning tools, see GOV.UK.