When your business invests in capital assets there are some valuable tax reliefs that can be claimed.
Capital purchases are generally higher value items that sit in the company’s balance sheet. They do not get deducted from income when calculating the business’ taxable profit. Instead, tax relief is given through ‘Capital Allowances’, which is the term given to the various tax reliefs available when incurring costs on items of capital expenditure. Capital Allowances can be given under a number of different guises: Annual Investment Allowances, Super-Deductions, or Writing Down Allowances.
The types of capital expenditure that can qualify for Capital Allowances depends on the nature of the business, but generally includes items such as commercial vehicles, cars, tools, industrial equipment, machinery, appliances, certain adaptations to buildings, computer equipment, etc.
Generally, Capital Allowances are not available on the purchase of land and buildings. But in some instances where the business uses a premises, Capital Allowances can be claimed on a portion of the building value relating to the embedded fixtures & fittings, or even on works to the active parts of the buildings such as plumbing system, fire alarm system, electrical system, etc.
A business buys the asset at the point it either buys it outright, or it enters into a loan/HP type arrangement for it.
A brief summary of the different types of capital allowance is given below:
Annual Investment Allowance (AIA)
The cost of certain capital additions may be fully relieved by the ‘Annual Investment Allowance’ (AIA). This is where 100% of the cost of the capital expenditure is given as a deduction against the taxable profits. The business therefore gets full tax relief for the cost of the capital expenditure in the year that it buys it.
All businesses are eligible to claim AIA up to the maximum limit each accounting period. The limit has fluctuated over the years. It is currently £1 million, but due to reduce to only £200,000 from 1 April 2023. This will be the lowest value it has been for many years, so it is worth considering short term future capital expenditure and whether that should be brought forward and undertaken before April 2023.
AIA is available on most assets and is therefore the first type of Capital Allowance claimed each year. AIA is available on commercial vehicles, but is not available on cars.
AIA is not available on the cost of land or buildings, but it is available on items of ‘Integral Features’.
Super deduction 130% relief
This is a new concept introduced with effect from March 2021. It only applies to companies, and not to unincorporated partnerships or sole traders. Tax relief is given for 130% of the amount spent on brand new assets. So if the company spends £100 it gets a tax deduction for £130. This works out even better than getting a full write off for the cost. It should be given in priority to the AIA where it is available.
The super deduction is available on most assets, but again with the exception of cars. It is not available on second hand assets, nor on land & buildings.
Environmental equipment – energy/water saving: 100% write off
Where a business buys certain energy saving or water saving equipment then it is allowed Capital Allowances at 100%. This gives the business full write off for the cost of the equipment in the year of buying it. HMRC produce a list of the types of equipment that is regarded as energy saving /water saving and it is more widely drawn than you may expect.
This category of capital allowances includes fully electric cars.
It is tax effective to claim this allowance for electric cars, otherwise cars would just be eligible for the standard writing down allowance, which gives tax relief at a slower pace and spread out over many years.
Ordinary Capital Allowances – writing down allowances
For all remaining assets that did not qualify for the above types of allowances (perhaps because the cost exceeded the annual limits, or because they were assets that did not qualify (such as cars), or because they already held by the business) there are standard ‘writing down allowances’ (WDAs) available to claim tax relief.
WDA’s give tax relief slowly. The cost of the capital equipment is spread out over a number of years and the tax relief is only given on the slice that is relieved in each year. For most items this will be 18% of the value allowable as a deduction each year (on a reducing balance basis). In theory this gives full tax relief, eventually, but it takes many years to achieve.
Additionally, certain items are only allowed 6% of the cost as a deduction each year (instead of the 18%). These types of items would typically be cars with higher CO2 emission figures or ‘Integral Features’ items within buildings. Any cars bought after April 2021 with CO2 over 50g/km are in this pool. This makes it very tax ineffective for businesses to buy cars with CO2 above 50g/km.
This is a relatively recent addition to the capital allowances regime. It includes work to buildings that historically would not have been eligible for any capital allowances at all, because it was historically seen to be part of the fabric of the building itself. Nowadays certain building improvement works can be regarded as ‘Integral Features’. This includes things such as a fire alarm system, plumbing system, electrical system, lifts, ventilation systems, etc.
Integral Features can get full write off under the AIA. This is subject to the annual cap of AIA (currently £1million). Any excess cost of Integral Features are relieved at the slower rate of 6% per year. (This is temporarily uplifted to 50% under the super deduction rules).
This is just a basic introduction to Capital Allowances. If you’d like to find out more please speak to an advisor at Ellis & Co Accountants on 01244 343504.