Capital Allowances

Capital Allowances

HMRC sets out certain rules when it comes to claiming tax relief on fixed assets.  You are still entitled to claim for full tax relief on any assets you buy since they are business expenses but the process and paperwork is slightly different to a normal business expense due to the fact you own the asset for more than one year.

What is a Fixed Asset

A fixed asset is something you buy to run your business, rather than an overhead.  Generally they last for a number of years and include things like:

  • Computers;
  • Tools;
  • Furniture;
  • Equipment.

The following rules do not apply to Cars

Why Do Capital Allowances Exist

When you buy a piece of equipment, say a Computer, you pay for it upfront and then use it for a few years. As your computer is a business expense you are entitled to get tax relief on what you have paid for it however as you will own it for a number of years that tax relief should match the number of years you use it over.  So if you pay £1,500 for a new computer and plan to use the computer for 3 years, then ideally you would claim £500 as an expense against your taxes for 3 years.

What this meant was businesses reduced the number of years they said they were going to use equipment for to accelerate their claim against their taxes, putting them at an unfair tax advantage. Therefore HMRC sets out rules for tax (not accounting) purposes as to the  the percentage claim a business can make for tax relief each year according to the type of capital asset purchased, called Write Down Allowances, regardless of the number of years the business plans to use the asset.

What Are The Write Down Allowances

Here the percentage amounts a business can claim against its taxes as set out by HMRC, there are 3 main categories:

1. Main Rate Pool – 18%

This pool includes things like plant & machinery, equipment and furniture.

2. Special Rate Pool – 8%

This is a unique category and refers to purchases which are:

  • parts of a building considered integral – known as ‘integral features’;
  • items with a long life of over 25 years;
  • thermal insulation of buildings;
  • cars with CO2 emissions of more than 130g/km.

3. Single Asset Pool – 18% or 8%

A business can create a single asset pool where an asset that has a really short life but you cannot include in this pool any cars, special rate items (number 2 above) or anything that you use for non business reasons.

How to Claim Your Capital Allowances

Capital Allowances are claimed on:

  • Your Self Assessment Tax Return if you are self employed
  • Your Business Tax Return if you’re a limited company
  • Your Partnership Tax Return if you are in a partnership

Always try to keep a breakdown of what you have included in each of the Capital Allowance pools so you have a record of what you have claimed and how much you have claimed each year.

Annual Investment Allowance

The Annual Investment Allowance is a valuable tax break introduced a number of years ago by HMRC to encourage and promote business development.  Under the rules of Annual Investment Allowance you can deduct 100% of the first £200,000 you spend on plant & machinery against your taxes in the year you have bought it, rather than using write down allowances of 18%.

So if you buy a Computer for £1,500 you will receive 100% tax relief against your profits in the year you bought it rather than £270 (£1,500 x 18%).