Capital Allowances

Capital allowances provide tax relief when a business buys certain long-term assets. They replace accounting depreciation when taxable profit is calculated and can reduce Corporation Tax or Income Tax.

Capital Allowances and Depreciation

Depreciation spreads an asset’s cost through the accounts over its expected useful life. HMRC does not normally allow this accounting charge as a tax deduction.

Instead, depreciation is added back in the tax computation and the business claims any available capital allowances. The timing and amount of tax relief may therefore differ from the depreciation shown in the accounts.

Annual Investment Allowance

The Annual Investment Allowance normally gives 100% tax relief on up to £1 million of qualifying expenditure each year. It commonly applies to equipment, machinery, computers, furniture and certain fixtures.

The limit may need to be shared by related businesses, and accounting periods shorter or longer than 12 months require care. Cars do not qualify for the AIA, although other allowances may be available.

Other Capital Allowances

Depending on the business and asset, relief may include:

• Full expensing for qualifying new plant and machinery bought by companies
• The 50% first-year allowance for qualifying special-rate assets
• Writing-down allowances where immediate relief is unavailable or not claimed
• First-year allowances for specific qualifying expenditure

Not every purchase qualifies, and special rules apply to cars, leased assets, buildings and assets used privately.

Timing and Planning

The asset normally needs to be purchased before the accounting period ends for relief to be available in that period. Hire purchase can qualify when the asset is brought into use, even where payments continue later, but the agreement must be reviewed.

It is not always best to claim every allowance immediately. Preserving allowances may be useful where profits are low, losses already exist or personal allowances would otherwise cover a sole trader’s income.

Disposals can produce balancing adjustments, and grants or contributions may affect the qualifying cost. Where an asset has mixed business and private use, the claim may need to be restricted. Evidence should show what was bought, when it became available and how it is used.

Keep invoices, finance agreements and a reliable fixed asset register. Tax relief should never be the only reason to buy something the business does not need.

GMS Accountants helps businesses in Cambridge and Nottingham calculate capital allowances and plan purchases. Contact us before making a significant investment.