Using capital allowances for tax relief on business expenditure

Confusion and lack of knowledge about capital allowances discourages many business owners from using this essential tax relief worth up to £1m. David Redfern, director of DSR Tax Claims explains the qualifying criteria for the £1m annual investment allowance (AIA)

Capital allowances can be used by businesses to maximise the tax efficiency of their business assets. These refer to larger or more expensive items of business expenditure, such as computer equipment, plant and machinery, and business vehicles.

In order to be eligible for capital allowances, the assets have to be solely for business use - personal and non-business usage is not permitted under HMRC regulations.

Non-physical assets such as patents and intellectual property (IP) can also be subject to capital allowances as assets of a business as can renovations and improvements to business property, although routine maintenance is not allowable.

A business, sole trader or partnership must be using traditional accounting methods to qualify for capital allowances. Sole traders and partnerships using cash basis accounting cannot use capital allowances although they can deduct such business purchases as a business expense.

The annual investment allowance (AIA) allows businesses to deduct the entire value of a business asset from profits before tax. In the October 2018 Budget, AIA was temporarily increased for two years to £1m per year from 1 January 2019. This increase, from the previous limit of £200,000 is intended to stimulate business investment.

Businesses can claim AIA on most plant and machinery purchases, with the exception of cars, which would be subject to writing down allowances instead. Items which were previously owned personally before being given to the business are also not eligible.

AIA can only be claimed in the accounting period in which the asset was purchased and businesses receive a new allowance for each accounting period. It may not be claimed in a business's final accounting period in order to prevent abuse of the allowance.

For assets which are not eligible, there are other allowances such as first year allowances and writing down allowances which allow a business to offset some or all of its business asset expenditure against profits before tax.

First year allowances are applicable to certain energy efficient equipment such as water saving equipment or zero emission goods vehicles, as long as they are new, and certain company cars with low CO2 emissions. These assets do not count towards the annual AIA limit and the allowance can be claimed alongside AIA.

For those assets which are not eligible for either AIA or first year allowances, it may be possible to claim writing down allowances where a percentage of its value is deducted, rather than the full value. Writing down allowances are also available on amounts over the AIA limit.

Limited companies should claim capital allowances through their company tax return, while sole traders and partnerships that use traditional accounting methods can claim through their self assessment tax returns. Partnerships must be standard partnerships, not partnerships where one partner is a limited company.

About the author

David Redfern is a director of DSR Tax Claims

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