Claiming capital allowances

Our experts tell you everything you need to know about claiming this allowance on your assets

Our experts at DSR Tax Claims know how hard it is to find good, quality information about HMRC’s tax regulations that is easy to understand, and that’s why we have created these handy guides to tell you everything you need to know. Our aim is to make life easier for our clients and that is why we want to share our expertise with you. You can also call our friendly team on 0330 122 9972 – we’re the tax experts you can trust.

What are capital allowances?

If you buy business assets such as computer equipment, machinery or business vehicles, and you keep them to be used in your business, they are called plant and machinery items and you can use the value of them to offset against your profits to reduce your taxable profit. This means that you would pay less tax as a result.

If you are a sole trader or a partner and you are using the cash basis accounting method, you can’t claim capital allowances but you can claim these items and allowable business expenses and account for them that way.

To claim capital allowances on the plant or machinery, you need to work out its value first. This will usually be the amount you paid for it but there are a few instances in which HMRC will expect you to use its market value instead. These instances include where the item was a gift or where you owned it before using it as a business asset. By market value, HMRC means the amount you would expect to get for it if you sold it.

You can claim other business expenses as allowable expenses. The expenses include the day-to-day running costs of your business, stock items for resale and any interest payments or finance costs.  The way you claim those will depend on your business set up. For sole traders or partners, you can claim these costs as a business expense. For limited companies, these costs need to be deducted from your profits as a business cost.

Are there any other areas where capital allowances can be claimed?

As well as claiming capital allowances for your plant and machinery items, you can also claim them for the following:

  • Any patents you own
  • Any research and development (R&D) your business carries out
  • Renovating business premises, where the premises are located in deprived areas of the UK
  • Intellectual property or “know how” your business may own regarding industrial techniques
  • Any mineral extraction or dredging your company does
  • Letting furnished holiday property – as long as it is available to let for 210 days in any given year and is let for 105 days or more.

What can you claim capital allowances on?

You can claim these allowances on any plant and machinery assets kept in your business – but the assets do have to be business assets. You can usually deduct the full cost of the items from your profits before tax by using the ‘annual investment allowance’ (AIA).

However, if you are a sole trader or partner with an income of £150,000 or less each year, you might be able to use cash basis accounting instead, which is a simpler method for smaller and less complex business set ups.

What does and doesn’t count as plant and machinery?

As far as HMRC is concerned, the following can be classed as plant and machinery:

  • Items that you keep to use in your business, including vehicles such as cars or vans
  • Costs involved in demolishing plant and machinery
  • Integral features of buildings which are business premises
  • Certain fixtures and fittings in business premises, such as fitted kitchens or bathrooms
  • Any alterations you have to make to your business premises to install other plant and machinery but this doesn’t include repairs that you have to make to the premises, just alterations.

You can claim repair costs as a business expense if you are a sole trader or partner, or you can deduct them as a business cost if you are a limited company.

When HMRC refers to integral features, they are referring to the following:

  • Electrical systems, including lighting systems
  • Air-conditioning systems
  • Hot and cold water systems (although this doesn’t refer to kitchen and bathroom facilities)
  • Space and water heating systems
  • Any lifts, escalators or moving walkways in the premises
  • Any external solar shading

Allowable fixtures include fitted kitchens and bathroom suites as well as fire, alarm and CCTV systems. You can claim these items whether you rent or own the premises but it has to be the person who bought the item who claims. If you are buying business premises from a previous building owner, you can only claim for the same integral features and fixtures they claimed for. The value of the features and fixtures must be agreed with the seller before you can claim them. If you don’t, you won’t be able to claim for them. By agreeing the value, the seller will also be able to account for them correctly.

If you let residential property as a business, you can only claim items as capital allowances if you runa furnished holiday lettings business or the item is in a common area of a residential building, such as an item in a shared hallway. There are special rules if you run a care home as a business.

What is annual investment allowance (AIA)?

This allowance allows you to deduct the full value of the item from your profits before tax. The item needs to qualify for the annual investment allowance (AIA) before you can deduct it. You can claim AIA on most plant and machinery, but it can’t be claimed on cars, items previously owned by you before they became a business asset or items given to you. You can claim writing down allowances on these items instead though.

If you sell the item after you have claimed AIA on it, you may need to pay additional tax.

The AIA amount was permanently set at £200,000 in 2016, although it was subject to a number of changes prior to that permanent change. The different amounts are detailed in the table below. If the AIA amount changed in the period you are claiming for, you need to adjust the amount you are claiming.

Sole traders/ partners Limited companies AIA amount
From 1st January 2016 From 1st January 2016 £200,000
6th April 2013 to 31st December 2015 1st April 2014 to 31st December 2015 £500,000
1st January 2013 to 5th April 2014 1st January 2013 to 31st March 2014 £250,000
6th April 2012 to 31st December 2012 1st April 2012 to 31st December 2012 £25,000
6th April 2010 to 5th April 2012 1st April 2010 to 31st March 2012 £100,000
6th April 2008 to 5th April 2010 1st April 2008 to 31st March 2010 £50,000

 

You get a new allowance for each accounting period. If your accounting period isn’t 12 months in length, you need to adjust your AIA accordingly. For example, if your accounting period is only 8 months, the AIA will be 8/12 x £200,000 which equals £133,333.33. If your accounting period is longer than 18 months, you need to split it into two parts, one equal to 12 months and the remainder in the other part.

When can you claim AIA?

You can only claim it in the period in which you bought the item. As far as HMRC is concerned, the date you bought it is either the date you signed the contract, if the payment is due within 4 months of that date, or when the payment is due if that payment date is over 4 months from when you signed the contract.

If it is purchased under hire purchase terms, you can claim for payments you haven’t yet made once you start using the item, but you can’t claim on any interest payments.

If your business closes, you can’t claim AIA for any items bought in your final accounting period.

You claim AIA through your Self Assessment tax return.

What if you are not claiming the full cost?

There might be instances where you don’t want to claim the full cost as AIA. If you have low profits, for example, you might not want to claim the full cost of the item. In which case you can claim writing down allowances instead or claim part of the cost as AIA and part as writing down allowances.

If you also use the item outside of your business, you can’t claim the full cost as AIA if you are a sole trader or partner. In these instances, you need to reduce the amount of capital allowance you claim by the amount of time you use the item outside of business. So, if for example, you have a computer which you use for business half the time and for personal use for the other half, you can claim capital allowances on 50% of the value.

If you have bought any item which is above the AIA amount of £200,000 you can claim writing down allowances on any amount above the AIA. If one single item takes you above that threshold, you can split the value between different types of allowance. It is only available for standard partnerships – if the partnership contains a company or separate partnership as one of the partners, you can’t use AIA.

What if you have more than one business or trade?

If you are a sole trader or partner with more than one business, each business gets a separate AIA. However, you will only get one AIA if both businesses are controlled by the same person and share the same premises or involve similar activities. If 2 or more limited companies are controlled by the same person, they will only get one AIA and they will need to decide how that AIA should be shared out between companies.

What are first year allowances?

If you acquire an asset which qualifies for a first year allowance, this means you are allowed to deduct the full cost from your profits before you calculate the tax you owe. You can claim first year allowances alongside your annual investment allowance (AIA) and they don’t count towards the AIA limit.

You might be entitled to claim ‘enhanced capital allowances’ which are a special type of first year allowance. These are allowable on certain energy saving and water efficient equipment to help your business to be more environmentally friendly. The type of equipment you can claim this allowance on includes:

  • Certain cars which have low CO2 emissions
  • Certain water saving equipment, such as water meters, efficient toilets and water saving taps. The equipment must be on the water efficient technologies list
  • Certain energy saving equipment as listed in the energy technology product list
  • Plant and machinery for gas refuelling stations. This includes such equipment as storage tanks and pumps
  • Zero-emission goods vehicles, as long as they are new
  • Biogas, hydrogen and gas refuelling equipment.

You can’t usually claim on items if your business buys them to lease out to other people or to use within a property which you let out.

You claim ‘first year allowances’ and ‘enhanced capital allowances’ on your Self Assessment tax return. If you don’t use up all of the first year allowances you are entitled to claim in one tax year, you can claim some of the remainder in the following year as a writing down cost.

What about business cars?

If you buy cars to use in your business, you can claim capital allowances on these vehicles. If you do this, you can deduct part of the value of the cars from your profit before tax, meaning that you will pay less tax. You need to use writing down allowances to work out what you can claim but cars won’t qualify for annual investment allowances (AIA).

You might also be entitled to claim mileage costs. If you are a sole trader or partner and you haven’t claimed these costs in any other way, you can use simplified mileage expenses to claim these costs on business vehicles. If you are an employee, you can’t claim capital allowances for your vehicles even if you use them for work but you will still be able to claim business mileage and fuel costs.

As far as HMRC is concerned, when claiming capital allowances, a car is classed as a type of vehicle which is suitable for private use, wasn’t built for transporting goods and most people use privately – this means that a motorhome would be classed as a claimable vehicle. Motorcycles (apart from those bought before 6th April 2009), lorries, vans and trucks don’t count as cars but you can claim AIA on these vehicles.

If you are a sole trader or partner and you also use your car for private use, you need to calculate how much you can claim by working out how much if your use is business as opposed to private use. If your business provides cars for employees or company directors, you can claim capital allowances on the full cost although you will need to report it as a benefit if they also use the vehicle for private use.

What are the rates for cars?

To encourage vehicle use which is kinder to the environment, the rates you can claim all depend on the CO2 emissions of the car and the date you bought it. The main and special rates apply from 1st April for limited companies and 6th April for sole traders and partners but the first year allowance rate applies from 1st April for all businesses.

The rates are shown in the following table:

Cars brought from April 2015
Description of car Which allowance you can claim
New and unused, CO2 emissions are 75g/km or less or the car is electric First year allowances
New and unused, CO2 emissions are between 75g/km and 130g/km Main rate allowances
Second hand, CO2 emissions are 130g/km or less or the car is electric Main rate allowances
New or second hand and CO2 emissions are above 130g/km Special rate allowances
Cars bought between April 2013 and April 2015
Description of car Which allowance you can claim
New and unused, CO2 emissions are 95g/km or less or the car is electric First year allowances
New and unused, CO2 emissions are between 95g/km and 130g/km Main rate allowances
Second hand, CO2 emissions are 130g/km or less or the car is electric Main rate allowances
New or second hand and CO2 emissions are above 130g/km Special rate allowances
Cars bought between April 2009 and April 2013
Description of car Which allowance you can claim
New and unused, CO2 emissions are 110g/km or less or the car is electric First year allowances
New and unused, CO2 emissions are between 110g/km and 160g/km Main rate allowances
Second hand, CO2 emissions are 160g/km or less or the car is electric Main rate allowances
New or second hand and CO2 emissions are above 160g/km Special rate allowances

 

The main rate allowance pool has a rate of 18% while the special allowance pool has a rate of 8%.

If you are claiming for any car bought before April 2009, you need to move the valance of those cars to your main rate allowances pool.

If your car doesn’t have an emissions figure, you need to use the special rate unless it was registered before 1st March 2001, in which case you will need to use the main rate.

How do you claim capital allowances?

How you claim all depends on the structure of your business. You will claim in your Self Assessment tax return if you are a sole trader, on your partnership tax return if you are a partner and on your company tax return if you are a limited company. Limited companies also need to include a separate capital allowances calculation.

The amount you claim is deducted from your profits before tax is calculated.

Employees claim these allowances in a different way. You will claim this as tax relief through your Self Assessment tax return.

When can you claim?

You need to claim in the same accounting period (or tax year) in which you bought the item if you want to claim the full value under either the annual investment allowance (AIA) or first year allowances. If you don’t want to claim the full value, you can claim part through writing down allowances and you can do this at any time as long as you still own the item.

As far as HMRC is concerned, when you bought the asset is counted as the date you signed the contract (if the first payment is due within 4 months of the contract being signed) or when the payment is due, if that is after 4 months. If the asset is bought using hire purchase terms, you can claim for payments you haven’t yet made once you start using the item but you can’t claim for any interest payments.

How can DSR Tax Claims help?

We aim to make life as simple as possible for our clients and that includes giving you the information you need to make your taxes (and your life) simpler and less stressful.  Our team of experts at DSR Tax Claims are always on hand to help our clients and our excellent standing with HMRC means that we can make sure you don’t fall foul of their regulations, while claiming your maximum tax relief. We can even take care of all that paperwork and deal with HMRC on your behalf too. Call our friendly team on 0330 122 9972 – we’re the tax experts you can trust.

This page was last updated on 26/10/2018.

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