Fixed Assets Explained (and How They Reduce Your Tax Bill)
What are Fixed Assets?
Fixed assets are items a business buys and uses over a long period of time, rather than selling straight away. Common examples include:
- Equipment and machinery
- Vehicles
- Office furniture
- Buildings and property
These are typically shown on the balance sheet and are often one of the largest values a business owns.
Why Fixed Assets Matter
Fixed assets are important because they:
- Support day-to-day operations
- Represent long-term investment
- Impact profits through depreciation
- Affect tax through capital allowances
Instead of treating the full cost as an expense immediately, businesses spread the cost over several years using depreciation.
Capitalisation – When Does an Asset Count?
Not every purchase becomes a fixed asset.
Under accounting rules, an item is usually capitalised when:
- It will provide future economic benefit, and
- Its cost can be reliably measured
Most businesses also set a capitalisation threshold (e.g. £1,000–£10,000). Anything below this is treated as an expense.
Fixed Asset Register – Keeping Control
A fixed asset register is essential. It includes:
- Purchase cost
- Date acquired
- Depreciation charged
- Current value
This ensures:
- Accurate accounts
- Better control of assets
- Easier year-end reporting
Poor record keeping can lead to errors and compliance issues.
Depreciation – Spreading the Cost
Depreciation reflects how assets lose value over time.
For example:
- Equipment: 3–5 years
- Vehicles: 4–5 years
- Fixtures: 5–10 years
Rather than a large one-off expense, the cost is spread, giving a more accurate picture of profit.
Capital Allowances – The Tax Benefit
While depreciation is used in accounts, capital allowances are used for tax.
What are Capital Allowances?
Capital allowances are tax deductions on capital spending, such as:
- Machinery
- Equipment
- Furniture
- Certain property improvements
They reduce taxable profit and therefore reduce corporation tax.
Key Types of Capital Allowances
1. Annual Investment Allowance (AIA)
- Allows up to £1 million of qualifying spend
- 100% tax relief in the year of purchase
2. First Year Allowances (FYA)
- Enhanced relief for specific assets (e.g. energy-efficient equipment)
3. Writing Down Allowances (WDA)
- Used when AIA is not available
- Relief spread over several years
How Capital Allowances Reduce Corporation Tax
Example:
- Profit before allowances: £100,000
- Equipment purchase: £20,000
- AIA claimed: £20,000
Taxable profit = £80,000
This directly lowers the corporation tax bill.
Using Capital Allowances Over Time
Not all assets are fully relieved immediately.
If AIA is not used or exceeded:
- The cost is written down gradually
- Relief is spread over multiple years
This can be useful for:
- Smoothing tax liabilities
- Planning future tax years
- Managing cash flow
Planning Opportunities
Capital allowances are a key planning tool:
- Time purchases before year end
- Use AIA efficiently
- Consider future profits before claiming everything at once
- Balance immediate relief vs spreading deductions
Common Mistakes to Avoid
- Not keeping a proper asset register
- Expensing items that should be capitalised
- Missing capital allowance claims
- Claiming incorrectly on non-qualifying items
Disclaimer
This blog is for general guidance only and does not constitute personalised advice. Tax rules may change and individual circumstances vary.
