Capital allowances

Tax relief is available on certain capital expenditure in the form of capital allowances but the amount of these allowances can vary depending on the type of asset acquired. At Page Ivy, we can provide advice on maximising tax relief for capital expenditure for your business in the Chesterfield area.

Overview

The cost of purchasing capital equipment in a business is not a revenue tax deductible expense. However tax relief is available on certain capital expenditure in the form of capital allowances.

The allowances available depend on what you're claiming for. In this factsheet we give you an overview of the types of expenditure for which capital allowances are available and the amount of the allowances.

Capital allowances are not generally affected by the way in which the business pays for the purchase. So where an asset is acquired on hire purchase (HP), allowances are generally given as though there were an outright cash purchase and subsequent instalments of capital are ignored. However finance leases, often considered to be an alternative form of ‘purchase’ and which for accounting purposes are included as assets, are generally denied capital allowances. Instead the accounts depreciation is usually allowable as a tax deductible expense.

Any interest or other finance charges on an overdraft, loan, HP or finance lease agreement to fund the purchase is a revenue tax deductible business expense. It is not part of the capital cost of the asset.

If alternatively a business rents capital equipment, often referred to as an operating lease, then as with other rents this is a revenue tax deductible expense so no capital allowances are available.

Plant and machinery

This includes items such as machines, equipment, furniture, certain fixtures, computers, cars, vans and similar equipment you use in your business.

Note there are special rules for cars and certain 'environmentally friendly' equipment and these are dealt with below.

Acquisitions

The Annual Investment Allowance (AIA) provides a 100% deduction for the cost of most plant and machinery (not cars) purchased by a business up to an annual limit and is available to most businesses. Where businesses spend more than the annual limit, any additional qualifying expenditure generally attracts an annual writing down allowance (WDA) of 18% (or 6% for the special rate pool) depending on the type of asset. The maximum amount is currently set at £1 million. Cars are not eligible for the AIA, so will only benefit from the WDA (see special rules for cars).

Please contact us before capital expenditure is incurred for your business in a current accounting period, so that we can help you to maximise the AIA available.

Full expensing

Between 1 April 2023 and 31 March 2026, companies investing in qualifying new and unused plant and machinery will benefit from first year capital allowances.

Under this measure, a company will be allowed to claim:

  • A first year allowance of 100% on most new and unused plant and machinery expenditure that ordinarily qualifies for 18% main rate WDAs (Full Expensing).
  • A first year allowance of 50% on most new and unused plant and machinery expenditure that ordinarily qualifies for 6% special rate WDAs.

The relief specifically excludes expenditure on cars, and most plant and machinery for leasing. The relief is only available for companies and not for unincorporated businesses.

Pooling of expenditure and allowances due

  • Expenditure on most items of plant and machinery are pooled rather than each item being dealt with separately with most items being allocated to the main rate pool.
  • A WDA on the main rate pool of 18% is available on qualifying expenditure incurred in the current period not covered by the AIA or not eligible for AIA as well as on any balance of expenditure remaining from earlier periods.
  • Certain expenditure on buildings fixtures, known as integral features (eg lighting, air conditioning, heating, etc) is eligible for a 6% WDA so is allocated to a separate ‘special rate pool’, though integral features do qualify for the AIA.
  • Allowances are calculated for each accounting period of the business.
  • When an asset is sold, the sale proceeds (or original cost if lower) are brought into the relevant pool. If the proceeds exceed the value in the pool, the difference is treated as additional taxable profit for the period and referred to as a balancing charge.

Structures & Buildings Allowance

Expenditure incurred on business-related buildings and structures will attract an annual 3% writing down allowance on a straight-line basis. This allowance is designed to encourage investment in the construction of new structures and buildings that are intended for commercial use, the necessary works to bring them into existence and the improvement of existing structures and buildings, including the cost of converting existing premises for use in a qualifying activity. Neither land nor dwellings are eligible for relief. Where there is mixed use, for example, between commercial and residential units in a development, the relief is reduced by apportionment. No relief is available for work spaces within domestic settings, such as home offices.

Special rules for cars

There are special rules for car expenditure. Cars are not eligible for the AIA or full expensing. The treatment of car expenditure depends on when it was acquired and its CO2 emissions.

The following rules apply for cars bought from April 2021:

Type of car purchase What you can claim
New zero emission car 100% first year allowances
Second hand electric car Main rate allowances (ie 18% WDA)
Not exceeding 50 g/km CO2 emissions Main rate allowances (ie 18% WDA)
Exceeding 50g/km CO2 emissions Special rate allowances (ie 6% WDA)

Non-business use element

Cars and other business assets that are used partly for private purposes, by the proprietor of the business (ie a sole trader or partners in a partnership), are allocated to a single asset pool to enable the private use adjustment to be made. For cars, the rate of WDA claimable in the single asset pool will still depend on the CO2 emissions of the car.Private use of assets by employees does not require any restriction of the capital allowances.

The allowances are computed in the normal way, however, only the business use proportion is allowed for tax purposes. This means that the purchase of a new zero emission car which costs £15,000 with 80% business use will attract an allowance of £12,000 (£15,000 x 100% x 80%) when acquired.

On the disposal of a private use element car, any proceeds of sale (or cost if lower) are deducted from any unrelieved expenditure in the single asset pool. Any shortfall can be claimed as an additional one off allowance but is restricted to the business use element only. Similarly any excess is treated as a taxable profit but only the business related element.

Capital allowance boost for low-carbon transport

A 100% First Year Allowance (FYA) is currently available for businesses purchasing new zero-emission goods vehicles, gas refuelling equipment and electric charge-point equipment.

Short life assets

For equipment you intend to keep for only a short time, you can choose (by election) to keep such assets outside the normal pool, with the expenditure going into a single asset pool. The allowances on them are calculated separately and on sale if the proceeds are less than the balance of expenditure remaining, the difference is given as a further capital allowance. This election is not available for cars or integral features.

The asset is transferred into the main pool if it is not disposed of by the eighth anniversary of the end of the period in which it was acquired.

Long life assets

These are assets with an expected useful life in excess of 25 years when new. These assets are combined with integral features in the special rate pool.

There are various exclusions including cars and the rules only apply to businesses spending at least £100,000 per annum on such assets.

Other assets

Capital expenditure on certain other assets qualifies for relief. Please contact us for specific advice on areas such as qualifying expenditure in respect of enterprise zones, Freeports and research and development.

Claims

Unincorporated businesses and companies must both make claims for capital allowances in tax returns.

Claims may be restricted where it is not desirable to claim the full amount available - this may be to avoid other allowances or reliefs being wasted.

For unincorporated businesses the claim must normally be made within 12 months after the 31 January filing deadline for the relevant return.

For companies the claim must normally be made within two years of the end of the accounting period.

How we can help

The rules for capital allowances can be complex. If your business is in the Chesterfield area we can help by computing the allowances available to your business, ensuring that the most advantageous claims are made and by advising on matters such as the timing of purchases and sales of capital assets. Please do contact us at Page Ivy if you would like further advice.

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After completing her A-Levels in 2017, Rebecca started her career in accounting by joining the Page Ivy team. Since then she has completed levels 2 and 3 of the AAT qualification and is currently studying towards level 4.

In the office, Rebecca works with our clients to assist them in preparing their VAT returns, assists with Xero Cloud-based bookkeeping and Accounting and is also trained in all matters of payroll.

In her spare time, Rebecca likes to, spend time with her friends and family, train dogs and more recently, has started to learn Spanish.

Since school Charlie has always had an interest in accountancy and followed up on his career aspirations by joining Page Ivy in 2017.

After three years of studying, Charlie is nearing completion of his AAT level 4 qualification and is looking to start his ACCA training imminently.

Charlie deals with the preparation of Limited Company, Sole trader and Partnership accounts along with preparing VAT and MGD returns.

In his spare time, Charlie enjoys watching football and spending time with his partner, friends, and family.

Danielle joined the Page Ivy team back in 2013 as an AAT Trainee, now qualified she is responsible for managing our Payroll  Bureau.

Her role includes processing weekly, bi-weekly, and monthly payroll runs, corresponding with HMRC on behalf of our clients,  preparing and submitting CIS 300 returns, assisting clients with all areas of payroll, HR, and Administration.

In her spare time, Danielle enjoys climbing, spending time with family and friends, and going on long country walks with her partner and dog.

Declan is the newest member of the Page Ivy team, starting with us in 2020.

Declan is currently studying towards level 2 of his AAT Apprenticeship and in the office, is getting to grips with data entry and analysis.

In his spare time, Declan enjoys country walking with his family and dog, sports events and more recently, learning to play the piano!

Megan joined our team in 2014 and has been ensuring that the Page Ivy office runs smoothly ever since.

Her role includes managing the team and their diaries,  handling client queries, and assisting with Administration.

Megan is a Xero certified Payroll advisor, meaning that when Danielle is on leave, Megan is on hand to run our payroll department.

Megan has two children, Isabella and Felicity, who like to keep her busy! In her spare time, she likes to keep fit, spend time with her family and online shop!

Abby started her career in accounting in 2009, working for a small practice in Chesterfield, alongside studying for her AAT qualification.

After three short years, in 2012 the opportunity arose to become Director of Page Ivy Accountants and she hasn't looked back!

Building long-lasting client relationships are of utmost importance to Abby, she has a passion for providing a high level of customer service and ensuring that our clients feel valued.

Abby is responsible for overseeing the preparation of VAT returns and MGD return prepared by the Page Ivy team; along with providing personal tax advice to a wide range of clients.

 

In her spare time, Abby enjoys, traveling, reading, and going to the gym.

Edward joined the team as a school leaver in 2012.  From here he went on to study Business Administration, AAT, and finally progressed on to complete his  ACCA qualification 2019.

Edward is a knowledgable, pro-active Senior accountant, who prides himself on providing high quality, in-depth, technical advice in a manner that is easily understood by his clients.

He is responsible for the preparation of Sole trader, Partnerships, and Limited Company accounts. As well as monthly and quarterly management accounts and conducting business reviews.

In his spare time, Edward likes to spend time with his friends and family,  spending time in his local pub and watching Derby FC collect 3 points.

 

Gareth started his career in accountancy in 2002. Since then he has worked in both small and medium-sized accountancy practices, working with a variety of clients from small businesses to advising quoted companies on Corporate Tax compliance and specialist claims, such as for Research and Development allowances. He places high importance on technical expertise, believing this to be essential to ensure clients can be safe in the knowledge they are fully compliant with HMRC’s requirements while minimising their tax liabilities. This is reflected in him being a fully qualified member of the Chartered Institute of Taxation, and a fellow of the Institute of Chartered Accounts in England and Wales.

He joined Page Ivy in 2012, since then he has taken responsibility for overseeing the preparation of clients Sole Trader, Partnership and Limited company accounts, as well as clients personal Self Assessment Tax Returns.

Alongside Abby he hopes to continue to develop both the technical expertise within the firm, and see the business continue to grow from strength to strength.

Outside of work Gareth has served as deputy leader of the town council, enjoys eating out, and fishing.

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