What are the different types of capital allowances?
Capital allowances are a fairly complex area of UK tax, but they can be beneficial to businesses, so having some insight into them could help you save money on your tax bill. In this guide we’ll be offering an overview the key types of capital allowances you should be aware of and why they are useful to claim.
Firstly, what are capital allowances?
Capital allowances are a form of tax relief that businesses can claim when they invest in assets that they expect to use for extended periods of time (longer than 12 months). By claiming capital allowance on an asset, you can deduct some or all of that asset’s value from your profits. Therefore, you’re reducing the amount of profit your business makes which means you won’t pay as much tax.
However, it’s important to note that different types of capital allowances will have different criteria. This may require balancing a portion of the asset’s worth against your Corporation Tax bill, as it is likely to lose value over time. In other instances, it could be that the business can write off the full cost of buying the asset in one year, which can make help save a substantial amount on your tax bill.
What can you claim capital allowances on?
You won’t be able to claim capital allowances on every asset you buy for your business. The purpose of capital allowances is to offer relief to business from the cost of wear and tear on capital assets and encourage investment in assets that will increase your business productivity. With that in mind, you can usually be eligible to claim capital allowances on:
- Machinery
- Equipment
- Business vehicles such as lorries, vans, or business cars
- Software
- Computers
- Office equipment
- Fixtures and fittings
Working out the value of an asset for capital allowances
When claiming capital allowances, you need to start by working out the value of the asset itself. In most cases, this will simply be the amount you paid for the item. However, you will want to use the market value (the amount you would expect to sell it for) if the item was gifted to you or you owned it before you began using it in your business.
Types of capital allowances
You can claim different amounts depending on which type of capital allowance you use. If your asset qualifies for more than one allowance, you have the option to choose which one you want to use. The main types of capital allowances for assets are:
this allows you to claim up to £1 million on certain assets (excluding cars and items you used for something else prior to your business). You can only claim AIA for an asset within the financial period you bought it. It can deduct the full value of an asset from your tax bill.
you can claim 100% of the amount for an asset in the year that it was purchased. This must be on qualifying items which typically consists of assets that are environmentally friendly. You can deduct the full value of an asset in the accounting period you bought it instead of spreading the tax relief out across several years.
the super deduction capital allowance was available on purchases made on assets between 1st April 2021 and 31st March 2023. Rather than claiming 100% of the item’s value, you could use the super deduction to claim 130%.
this can be used if your asset doesn’t qualify for AIA, or you have already claimed the maximum amount. Writing down allowances are used to claim relief on the value of an asset over an extended period.
What happens if you dispose of an asset?
If you decide to dispose of an asset from your business, you should calculate the difference between the value of the asset (accounting for depreciation, known as the written down value) and the value of how much you disposed of the item for. If the written down value is greater than the cost you got rid of it for, you will have a loss that can be offset against your Corporation Tax. On the other hand, if the asset is sold for more than the written down value, you might be required to pay more tax.
This is why it’s important to carefully consider which type of capital allowance you want to claim, as it affects the amount you can claim, especially on an item that will be considered high value when sold.
Conclusion
If you have any further questions about capital allowances or are looking for professional chartered accountants Wirral, the team at Jan McDermott Chartered Accountants can help. Our accountants have many years’ experience in the industry and have developed a good understanding of various business needs. You will get relevant and dedicated ongoing support with your accountancy at a fixed fee with no hidden costs. Contact us today to learn more about our services and book a free consultation to discuss your needs.