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.
How do you calculate capital allowances?
We know that capital allowances can be a tricky matter to get your head around. After all, it’s not just a case of adding them as a business expense in your Self Assessment tax return – there’s the whole matter about rates and pools to understand as well. However, when treated correctly on your tax return, they can make a real difference to the amount of tax you owe.
If you buy a business asset for your business, you can usually deduct the full value of the asset from your profits before tax by using your ‘annual investment allowance’ (AIA). You can claim AIA on most plant and machinery assets up to the AIA allowance amount – currently set at £200,000 per calendar year. You can’t claim AIA on cars, items gifted to you or your business or items previously owned by you and used for a different purpose outside of your business.
If you have already used up your AIA allowance or the asset doesn’t qualify as an AIA allowable asset, you can use ‘writing down allowances’ instead. When using writing down allowances, you deduct a percentage of the value of the asset from your profits each year. The percentage amount you can deduct depends on what the asset is – for example, if the asset is a business car, the rate you can deduct depends on its CO2 emissions.
Why do you need to know the value of the asset?
The value of the asset will determine how much you can deduct using your AIA allowance or writing down allowances. For most assets, the value will be what you paid for the item. However, HMRC may expect you to use the market value of the asset if it was a gift or was previously owned by you before you started to use it in your business.
How do you claim capital allowances?
The first thing you need to do is group the assets you have bought into ‘pools’ – these pools are based on the percentage rate they qualify for in writing down allowances or AIA.
When you know the value of the assets and the percentage rate you can claim per tax year for those assets, you then deduct that amount from your profits before tax on your Self Assessment tax return. The amount left in the pool becomes the starting balance for the next accounting period.
What are the rates and pools?
Rates and pools apply to writing down allowances. If you are claiming these writing down allowances, you need to group your asset items into groups depending on which rate they qualify for.
There are 3 types of pool:
- Main pool, which has a rate of 18%
- Special rate pool, which has a rate of 8%
- Single asset pools, which have a rate of 18% or 8% depending on the asset item in question.
What is the main rate pool?
The main rate pool applies to all plant and machinery assets. You can add the value of all your plant and machinery assets to this pool, unless they are in the special rate pool or a single asset pool (if, for example, you have chosen to treat them as short life assets or you have used them outside of your business).
To be classed as plant and machinery for capital allowances, you must own the asset – if you lease the asset, you can’t claim for it.
You can’t claim on buildings (including the doors, gates, mains water or gas systems), land and structures (such as roads or bridges) or items used only for business entertainment purposes (for example, if your business was lucky enough to own its own yacht).
You can claim plant and machinery capital allowances for the costs of demolishing plant and machinery, certain fixtures (such as fitted kitchens) or alterations you have made to a building to be able to install or house plant and machinery (this doesn’t include repairs though).
Buildings don’t qualify for capital allowances.
What is the special rate pool?
There are certain assets that you have to claim a lower rate of 8% on. These assets are:
- ‘Integral’ features of a building – these include such things as lifts, escalators, moving walkways, space and water heating systems, hot and cold water systems (though not kitchen or toilet facilities), air-conditioning or air-cooling systems, electrical systems including lighting, and external solar shading.
- Items with a long life
- Thermal insulation of your business buildings
- Cars which have a CO2 emissions greater than 130g per km.
You could claim AIA on all of these asset items (except cars) instead so you should only claim writing down allowances at 8% on these items if you have already claimed the full amount of your AIA allowance.
What counts as ‘long life’ items?
If you have assets with a useful life of at least 25 years from when they were new, these are classed as ‘long life’ assets. These should be put in the special rate pool if the value of all the long life items you buy in a single accounting period (if you are a sole trader or partner, this will be the standard tax year) adds up to £100,000. They can be placed in the main rate pool if their total value is less than £100,000.
You will need to adjust the £100,000 limit if your accounting period is more or less than 12 months. For example, if your accounting period is only 8 months, your long-life item limit will be:
8/12 x £100,000 = £66,666.67
What are single asset pools?
Depending on your assets, you may need to create one of more separate pools to account for single assets. You will need to do this for single assets if one of the following applies:
- The asset has a short life (so, assets which you won’t be keeping in your business for a long time)
- The asset is also used outside of your business, if you are a sole trader or business partner.
Short life assets might include such items as cars, special rate items or items which are also used for non-business purposes. It is your choice whether to treat something as a short life asset. You can pool together large numbers of very similar items to create a single asset pool if you wish – for example, if you are a restaurant owner with a large amount of crockery.
The pool will end when you sell the asset so you can claim capital allowances over a shorter period. You would move the balance into your main pool in your next accounting period if your business is still using the item after 8 years.
If you have decided to create a short life asset pool, you need to inform HMRC on your tax return if you are a limited company. You must inform HMRC within 2 years of the end of the tax year in which you bought the asset. If you are a sole trader or business partner, you need to inform HMRC in writing – make sure you include the cost of the asset and when you acquired it. The deadline for informing HMRC is the online tax return deadline for the tax year after the one you bought the asset in.
If you use an asset outside of your business and you are a sole trader or a business partner, you need to create a separate pool for that asset. You will then work out your capital allowances either at the main rate of 18% or the special rate of 8% depending on what the asset is. You need to reduce the amount of capital allowances you claim by the amount the asset is used for non-business purposes. So, for example, if you are a sole trader and you buy a computer which you only use for business purposes for half the time, you need to reduce the amount of capital allowances you claim on the computer by 50%.
If your accounting period is more or less than 12 months you need to adjust the amount of writing down allowances you claim in accordance with the length of your accounting period.
What about items you have claimed AIA or first year allowances on?
You need to record any items you have claimed AIA or first year allowances on in the pool they qualify for. If you are claiming the full cost of the item, you need to record its value as zero. This will help you work out whether you will owe any tax if you sell the asset.
If there are any items you haven’t claimed annual investment allowances (AIA) or first year allowances for, you add those costs on to the pool for the following year.
How do you work out what you can claim?
Firstly, you can claim the full cost of the asset if you are claiming annual investment allowance (AIA) or first year allowances on the item. First year allowances allow you to deduct the full cost of certain assets from your pre-tax profits – these assets include energy-saving plant and machinery items. First year allowances are in addition to annual investment allowances and don’t count towards the AIA limit.
You then need to work out what you can then claim separately for each pool that you have assets in. To do this, you need to do the following:
- Take the closing balance from your last accounting period and add the value of anything you have bought or been given in the current period which qualifies for this pool. You can only include the VAT if you’re not VAT registered.
- You then deduct the value of anything you have sold or disposed of which originally qualified to be in this particular pool.
- Work out how much you can claim depending on the particular pool rate – 18% or 8%.
- Deduct the amount you know you can claim from the pool to show you the closing balance. This is called the ‘tax written down value’.
For example, you are working out your main pool and you have an opening balance of £10,000. You then buy a plant asset worth £2,500 – your pool total is now £12,500. You have also sold a piece of machinery for £1,000. The pool total now stands at £11,500. You then apply the main pool rate of 18% to this amount to give you the amount you can claim in this accounting period – this is £2,070. The remainder of this pool (£11,500 – £2,070) is £9,430 which is your closing balance (or tax written down value) for this pool. This is then carried over to the next accounting period and becomes your new opening balance.
For items used outside your business
For items you use outside your business, you reduce the amount you can claim by the amount you use them privately. These items would be in single-asset pools. You still deduct the full amount from your pool to get the closing balance.
For example, you have a car in a single asset pool which qualifies for a rate of 18%. The opening balance of this pool is £11,000 and you use the car for your own family purposes for half the time. The amount you could have claimed for full business use is £1,980 (18% of £11,000) but because you use the car for personal reasons for half the time, you can only claim 50% of that which would be £990. You would claim £990 on your tax return but you would deduct the full amount of £1,980 from the balance of the pool, which would leave a closing balance of £9,020. This becomes the starting balance for the next year.
For items you use privately but which aren’t in single asset pools
If you have already claimed capital allowances on an asset which you then use for non-business purposes, you need to add the market value of the item to a single asset pool and deduct the same amount from the pool it was originally in. If the value you deduct is greater than the balance of that pool, the difference is known as a balancing charge and you need to report this on your tax return.
Can you claim less than you are entitled to?
Yes, you don’t have to claim the fill amount you are entitled to claim. Any unclaimed remainder becomes part of your closing balance in that pool.
What if you have less than £1,000 in your pool?
If the balance of your main or special rate pool is £1,000 or less before you work out your allowance, you can claim the full amount. This is called a ‘small pools allowance’. It doesn’t apply to single asset pools though.
You can either claim a small pools allowance or a writing down allowance – you can’t claim both though.
This amount should be adjusted if your accounting period is more or less than 12 months. For example, if your accounting period is only 8 months, the limit you could claim would be:
8/12 x £1,000 = £666.67
You claim your capital allowances in your Self Assessment tax return.
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.