Capital Allowances - Brookson Ltd

Capital Allowances

If you buy an asset for use in your business, you cannot deduct your expenditure on that asset from trading profits. Instead you claim a capital allowance for that expenditure. Capital allowances can be claimed on:

  • The costs of vans, cars, machines, scaffolding, ladders, tools, equipment, furniture, computers and similar items you use in your business.
  • Plant and machinery investment.
  • Items used privately before using them in your business.

The aim of capital allowances is to provide tax relief for the reduction in value of certain capital assets by letting you write-off their cost against the taxable income of your business. You won't necessarily be able to claim all the expenditure on an asset in the accounting period when you bought it.

The amount you can claim also won't usually be the same as the 'depreciation' in your year-end accounts as this is calculated differently. Depreciation is an accounting concept that aims to spread the cost of the fixed assets your company purchases over the period that you use them. HMRC does not allow depreciation to be deducted in the calculation of the taxable profit. In arriving at the taxable profit (the amount on which your tax liability will be based) you add back the depreciation and deduct the capital allowances in your company tax return.

Where you purchase inexpensive items of equipment, instead of claiming capital allowances you may be able to claim an expense deduction for the full cost in the year that they are acquired. This could apply if the cost of the item is small and it replaces one on which capital allowance have not been claimed. These could be items such as small tools or protective clothing.

There are different types of capital allowances. For each allowance, there are special rules to calculate how much relief you can claim. You have to follow these rules, rather than the method used in your accounts for calculating depreciation.

The Annual Investment Allowance relates primarily to  standard plant and machinery such as computer equipment, vans and motorcycles.

Annual Investment Allowance

Annual Investment Allowance was introduced for the year 2008/2009. The annual investment allowance cap has varied over the previous years, however, qualifying assets acquired after 1st April  2014 are subject to a cap of £500,000 per annum falling to £200,000 from 1st January 2016.

Annual Investment Allowance is calculated by adding the cost of your purchases within the same accounting period together. If the total is less than the “capped”  amount you can claim 100%. Example 1 shows how this works.

Enhanced Capital Allowances and First Year Allowances

Plant and machinery 'enhanced capital allowances ' enable you to make a claim for up to 100 per cent of the cost of certain qualifying items against your business profits in the year of purchase. Enhanced Capital Allowances  of 100 per cent are currently available for expenditure on:

  • Certain energy-saving and water efficient equipment, but only if the item appears on a specific list of qualifying equipment
  • Certain vehicle gas refuelling equipment

First Year allowances relate principally to electric or very low CO2 emission cars  if their CO2 emissions are less than 95g/km for 2015/16 and or 75g/km or lower in 2016/17.

The “ECA” and “FYA” are  in  addition to your available  annual investment allowance.

Capital Allowances on cars

 

If the motor car  does not qualify for  first year allowances then it will either be allocated into the “General Pool” or “Special Rate Pool” depending on the CO2 emissions of the vehicle.

The company qualifies for a deduction of either 8% or 18% of the cost price of the car ( pro-rated if it is not a full twelve month accounting period) annually until the pool is used up.   The table below summarises the  capital allowance treatment of cars for 2016/17 and 2015/16:

Type of car purchase

Allocate

Allowance

Electric/low emission car not exceeding 75g/km CO2(2016/17)

Electric/low emission car not exceeding 95g/km CO2(2015/16)

General pool

100% allowance

Not exceeding 130 g/km CO2 emissions

General pool

18% WDA

Exceeding 130 g/km CO2 emissions

Special rate pool

8% WDA

Ceasing  using an item for business

If you stop using an item of equipment for your work during the year, you need to make various adjustments to the allowances you have claimed. These adjustments are from the date you stopped using the item for work or sold it.

There are two types of adjustment:

Balancing allowance - The balance of expenditure brought forward from the previous year (if any), minus the sale proceeds (or market value if you did not sell them) of the items(s) at the date of cessation, or when you stopped using them for your official duties. This means that you will pay less corporation tax, as you have not fully claimed the capital allowances against the original costs of the assets.

Balancing charge - If the disposal value is greater than the value of the pool brought forward then a balancing charge may be due. This means that you will pay additional corporation tax as the proceeds on disposal means that you have received an  excess of allowances. 

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