Tax Savings on Capital Expenditure
Capital allowances are available on energy efficient, low carbon, or zero carbon technology for your business, which could help reduce your tax bill.
What are Capital Allowances?
Expenses incurred during the course of your business can be classed as either ‘trading expenses’ (which are profit and loss items), or ‘capital expenses’, which appear on the balance sheet.
Usually, a more expensive item or asset will be capitalised if it is intended to benefit the company for longer than a year.
Capital allowances are a way of obtaining tax relief on certain types of capital expenditure. Capital allowances are applied as an expense over a period of years and appear as a deduction on the tax computation / return.
Capital allowances can be likened to depreciation, however where depreciation is stated in the accounts on the profit and loss as an expense, it is then added back to calculate tax.
Capital allowances on the other hand are the HMRC form of depreciation and do not feature in the accounts but are taken into account and deducted during the tax computation, reducing the tax liability due, consistently over a period of years.
What qualifies for Capital Allowances?
Usually you must own the asset on which the capital allowances are to be claimed, so leasing and hiring don’t apply, though these may be able to be claimed as revenue expenditure.
What are the allowances I can claim?
AIA – Annual Investment Allowance. If you choose, you can claim 100% of the cost of plant and machinery and work vans in the first year, up to a maximum of £200,000. You can only use AIA in the first year you buy the asset. It is usually worth claiming this in the first year, even if you make a loss, because if you don’t, you will lose it.
FYA – If you buy an asset which qualifies for the First Year Allowance, you can claim up to the full amount of the asset in the first year, thereby maximising the tax relief as soon as possible. Assets qualifying for first year allowances include some new, low emission cars (note; cars are not allowable under AIA’s) and some types of environmentally beneficial equipment.
WDA – Writing Down Allowances are used for most cars not under the FYA, and for anything which was not claimed using the AIA. The percentage of the remaining asset is claimed each year until the asset is used up. Cars and some other items are rated at 8% per annum, with everything else, including vans rated at 18%. It is worth noting that if any aspect of the asset is made available for personal use, then the capital allowances can only be deducted on the business aspect.
What are Enhanced Capital Allowances?
Enhanced capital allowances are a variation of first year allowances and enable claiming of the full amount of the item in the first year. These include;
- Some low emission CO2 cars
- Energy saving equipment which features on the energy technology list
- Water saving equipment on the water efficient technologies product list
- New zero-emission goods vehicles
What’s the bottom line?
If you are thinking of purchasing a large item such as a car, equipment or new technology for your business, speak to us so we can advise on what allowances might apply and how we can maximise the tax efficiency of your capital purchase.