What capital allowances can I claim?
What are capital allowances?
Expenses you incur in your business can either be revenue (trading) expenses or capital expenditure. Capital expenditures are for fixed assets, which are expected to be productive assets for a long period of time. Revenue expenditures are for costs that are related to specific revenue transactions or operating periods, such as the cost of goods sold or repairs and maintenance expense.
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. They are given by reference to periods of account – for example capital expenditure in the year to 30 September 2016 is also eligible for capital allowances in the 2016/17 tax year.
Capital allowances are claimed once the expenditure is incurred and not necessarily when the asset is brought to use. Incurred meaning the date on which the obligation to pay it becomes unconditional.
Does all capital expenditure qualify for capital allowances?
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.
How do I claim capital allowances?
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. However a company may claim less than the maximum or none at all – saving the allowances for future periods.
How do I find out what types of expenditure qualify?
The most common assets that you may purchase and that will qualify for capital allowances are as follows:
•Computer, printer, etc
•Tools, for example lawnmower, saw, etc
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.
What are integral features?
Integral features are fittings within the building that cannot easily be removed, for example cold water systems, electrical systems, heating or ventilation systems, etc.
What are fixtures?
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.
What rates are capital allowances given on plant and machinery?
1.The ‘normal’ allowance the main rate pool with WDA of 18%
2.Special rate pool with WDA of 8%.
3.Single asset pool with a rate of 18% or 8% depending on the item.
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 – see HMRC website for maximum limits. You cannot claim AIA on cars.
However you can claim First Year Allowance (FYA) on environmentally friendly NEW cars ie 100% allowance.
How can i claim First Year Allowance (FYA)?
Also called ‘enhanced capital allowances’. This is 100% allowance on for the following energy and water efficient equipment:
– some cars with low CO2 emissions
– energy saving equipment that’s on the energy technology product list, eg certain motors
– water saving equipment that’s on the water efficient technologies product list, eg meters, efficient toilets and taps
– plant and machinery for gas refuelling stations, eg storage tanks, pumps
– gas, biogas and hydrogen refuelling equipment
– new zero-emission goods vehicles
What expenditures are allocated to the Special rate pool with WDA of 8%?
You have to claim a lower rate of 8% on:
parts of a building considered integral – known as ‘integral features’
– items with a long life (>25 years & 12-month spent min of £100k)
– thermal insulation of buildings
– cars with CO2 emissions of more than 130g/km
What happens if the capital allowances rates change part way through my accounting period?
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. If your expenditure is more that the AIA, then you can claim the AIA first and then claim writing down allowances on the balance.
What qualifies as a plant?
Key test is the function vs setting test. The plant passes the test if it performs a function as apparatus in the taxpayer’s business, and case law includes several instances where entire large assets have been held to be plant, even though they are also the setting.
What are short life assets?
It’s up to you to decide whether you want to treat something as a short life asset. You can’t include:
items you also use outside your business
special rate items
Large numbers of very similar items can be pooled together (for example, crockery in a restaurant).
The pool ends when you sell the asset. This means you can claim the capital allowances over a shorter period.
Move the balance into your main pool in your next accounting period or tax year if you’re still using the item after 8 years.
It is a way of giving tax relief on part of the value of assets held in a pool. It is like depreciation expenses but from the taxman’s point of view. As most assets now qualify for annual investment allowance it is less common to see additions being made to the general writing down allowance pool. But sales of assets may impact on the pool.
Buildings – including FIXED walls & floors, ceilings etc DO NOT qualify for plant and machinery but add to the cost for Capital Gains tax.
Integral features – these are fixtures singled out in the legislation as integral features of the building: cold water systems, electrical systems, heating or ventilation systems – 8%. These can include washrooms, kitchen taps etc.
Sanitary items – such as urinals, toilets, basins specifically included in legislation as P&M; as the have a “functional use”.
Paintings, murals etc – Scottish Vs Newcastle Brewaries case – Paintings & murals played a “functional use” hence P&M.
Other movables – Loose rugs, tables, chairs, kitchen equipment, table lamps etc – all have functional use and hence P&M @ 18%.
What happens to capital allowances if accounts are drawn up for a period that is not 12 months?
First Year allowances are never pro-rated. Writing down allowances are pro-rated to the length of the period of accounts ie is proportionately reduced or increased if the period of account is less than or more than twelve months. So if a 6 month period of accounts is prepared (say, at the start of trading),writing down allowances are 6/12 of the usual amounts.
If the accounting period is 12 months, you could still claim full WDA even if the asset is purchased on the last day of the year.
What happens to capital allowances when I commence a second trade?
If your accounting date ends in 31 December 2017 and you commerce a second trade, say on 1 July 2016, then the capital allowances related to the second trade are pro-rated – 6/12 in the case above.
What items fall into the special rate pool?
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.
What capital allowances will a car get?
The Government continues to use capital allowances to try and encourage the use of 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. You can check the actual levels of CO2 emissions of your car and the capital allowance treatment by visiting the HMRC website.
What happens when I purchase an asset but can’t get AIA?
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.
What happens when I sell an asset?
If you sell an asset you deduct the sales proceeds from the balance of the pool, but you cannot deduct more than the original cost of the asset. In most cases AIA will previously have been claimed and as these assets would ordinarily have formed part of the writing down allowance pool, the proceeds must go through this main pool.
– If disposed to a non-connected person – deduct the lower of actual consideration or original cost from asset pool.
– If disposed to a connected person – deduct actual consideration if purchase can claim capital allowances, otherwise use market values.
What happens if the sale proceeds are more than the balance of expenditure in the general pool?
If you deduct the sale proceeds of the asset on which you have previously claimed AIA from the general pool and 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.
Should capital allowances computations include VAT?
Capital allowance computation should only include non-recoverable VAT.
First-Year Tax Credits
•This is payable tax credit similar to those for research & development relief, and the film tax scheme is available for companies which incur capital expenditure on energy-saving planet and machinery, or environmentally beneficial plant and machinery. The relief may be claimed for expenditure incurred during the period to 31st March 2018. A decision on the future of this scheme will be taken at the end of this period.
•A company is able to claim a first-year tax credit in respect of an accounting period in which it has a surrenderable loss. Tax credits are not claimable if the company is able to offset the first year allowance claim against its profits.
•The tax credit takes the form of a cash payment, calculated at the rate of 19% of the relevant expenditure. The credits are limited to the greater of £250,000, or total company tax paid under PAYE and NIC liability for the relevant accounting period.
•A company may claim the first-year tax credit in whole, or in part.
•A clawback charge may arise in respect of the disposal of the tax-relieved plant and machinery which is disposed of within the period ending 4 years after the end of the accounting period for which the tax credit is paid.
Fungible short-life assets
Give rise to balancing charge or balancing allowance.
R&D Relief is a Corporation Tax relief
There are two schemes for claiming relief:
•The Small or Medium-sized Enterprise (SME) Scheme – < 500 employees , < €100 million or a balance sheet < €86 million; and <25% is owned by a large company; Consider all related companies >25%
•The Large Company Scheme – everything else
Qualifying expenditure for R&D credit at 11%/ SME 130% super deduction
2.external provided staff @65% (100% of cost allowed if connected & joint election)
3.subcontractors (@65% for SME; zero for large companies unless charity & university-100%)- same comments re joint election as above. For large companies- the recipient gets R&D. If recipient is SME, they get R&D credit @11%
4.R&D consumables – including software
Ways to enhance R&D credit
Avoid subcontracts but hire as employees directly
If the staff provider and the company are connected, 100% instead of 65% can be claimed