WHAT ARE CAPITAL ALLOWANCES?
HMRC allows you to claim for your capital expenditure that you have incurred, against any taxable profit. What ever you can claim is known as Capital Allowances. There is a wide range of assets that, if purchased for business use, can be eligible for Capital Allowances. Equipment, research cost, renovation expenses can all be claimed for. Any spending on non-durables cannot be claimed for under Capital Allowances.
However, you should know that not all assets are eligible under Capital Allowances Scheme. For some assets, only partial value can be claimed for. There is a possibility that you may claim capital allowance in one year or deduct the allowance over several years. Whatever the case may be, you will mention your capital allowance and how it is being claimed when you submit tax returns to HMRC.
DO ALL CAPITAL EXPENSES BECOME ELIGIBLE FOR CAPITAL ALLOWANCES?
No. All capital expenses do not become eligible for capital allowances. As a general rule only purchased assets are eligible. Leased or Hire Purchased Assets do not count under capital allowances scheme. There are however, tax reliefs available on revenue expenditures for lease or rental value of such assets.
The most common assets that qualify for capital allowances are Vehicles, Computers, printers, specialist tools like lawn mowers and specialist machinery. Costs of buildings and property are not included, although some of it may be a part of integral features or fixtures. There are further allowances available if you buy energy efficient plant and machinery.
Things like buildings itself, utility systems like gas systems or water heads, structures like roads, bridges, lands and any item used solely for entertainment like office karaoke machine in café will strictly not be included in capital allowances.
HOW TO CLAIM CAPITAL ALLOWANCES?
You will claim capital allowances in your annual Self-Assessment Returns. Any claims you make must be within 12 months after the 31st January deadline for filing the returns.
CAN CAPITAL ALLOWANCES BE CLAIMED FOR ASSETS USED FOR PART-BUSINESS AND PART-PERSONAL USE?
This is allowed. However, you will claim capital allowances only for the part you use for business. Let’s take an example of a car that you purchase but use 25% of time for non-business personal use. If your capital allowances are calculated as £2000, you will claim on 75% of this which is £1,500. The value of car that will be carried forward into next year will be reduced by £2,000 however.
HOW DO CAPITAL ALLOWANCES WORK?
There are generally two types of capital allowances available.
- Annual Investment Allowance: under AIA you will deduct the entire value of the asset up till £ 1 million annual limit of Capital Allowances. You will claim this deduction in the same tax year when you have acquired the asset. Generally, all plant and machinery are eligible for annual investment allowance. However, most cars and items that were initially purchased before they were used in the business are not eligible for AIA.
- First Year Allowance: this is alternatively known as the enhanced capital allowance. This is available in addition to the basic AIA for certain assets only. The deduction can be made in the year the asset was purchased. This explains why its is called first year allowance. FIA is generally available on energy or water efficient plant, machinery and equipment, low CO2 emission cars and zero emission vehicles.
In case you have not claimed AIA or FYA that you were entitled to, you cannot backdate your claim. However, you can claim part of the cost in following accounting periods by writing down allowance schemes. Writing down allowance scheme are even available for some assets that were initially not eligible for AIA or FYA. Most items are eligible for a 18% writing down allowance rate. Certain assets like integral building features like air conditioning systems and escalators, items with more than 25-year life, thermal insulations systems of building or cars with higher emission rates will be eligible only for 8% deduction rate instead of 18%.
FINAL WORDS ON CAPITAL ALLOWANCES:
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