Business expenditure can be classed as trading expenditure or capital expenditure. If an item has lasting benefit for the company (such as plant and machinery), then it is typically considered capital expenditure. Capital allowances are forms of tax relief on certain types of capital expenditure. The primary aim of capital allowances is to claim a proportion of the cost of the expenditure back against your company’s taxable income or profits. In turn, this reduces your tax bill and allows you to write off the cost of capital expenditure over time.
Understanding capital expenditure and revenue trading
Trading or revenue business expenses are items that last for shorter periods. For example, office stationery is a revenue expense; as most day to day accounting items will be. However, capital expenditure, or capital expense, is a more significant item of expenditure, usually benefitting the company over a longer period of time. You would expect the company asset to benefit the company for more than a year for it to be considered capital expenditure.
HMRC capital allowances rules – what are capital allowances for?
Capital allowances are available on the fixed contents of your business. As mentioned above, they have to be regarded as a benefit for your company for the tax relief. The UK government states you can claim capital allowances on company assets that are used to keep you in business. The tax relief can refer to allowances for plant and machinery expenditure, equipment and business vehicles, for example. The capital allowances list can also include heating for your company building, as well as lifts, computers, air conditioning; anything that benefits your business over a fixed term.
What is Annual Investment Allowance (AIA)?
Annual Investment Allowance enables companies to claim 100% of the cost of plant and machinery for the business, in the year that you buy it. The AIA is an important form of tax relief for all business owners, providing relief at 100% for assets up to £200,000.
However, it is important to note that you can only use your AIA within the first year that you buy the company asset. If you choose not to claim the Annual Investment Allowance in the year that you buy the plant or machinery, you will not be able to claim tax relief the next year. You can not claim AIA for equipment that is leased, that you have previously purchased and moved to your new premises, or items for business entertainment.
Writing Down Allowance (WDA)
The Writing Down Allowance (WDA) refers to tax relief if you have already claimed the full Annual Investment Allowance on items within the first year. WDA is also an alternative to tax relief, should your company assets not qualify for AIA. These assets could include items that you had bought before you claimed the AIA or even items such as cars.
Writing Down Allowances are split into separate groups, depending on the tax relief. They need to be grouped into ‘whole life assets’ – such as heating systems – and ‘short life assets,’ including vehicles.
Enhanced Capital Allowance (ECA)
Enhanced capital allowance is another form of capital allowance. The Enhanced Capital Allowance (ECA) was introduced in 2001, to encourage the use of energy-saving plant and machinery, as well as low carbon dioxide emission cars and other similar items.
Qualifying for the ECA provides fantastic tax saving for companies, allowing you to claim 100% on company assets. You can claim the Enhanced Capital Allowance in the first year of the installation.
Research & Development (R&D) tax relief
Research and development tax relief is available to businesses in the science and technology market. You can claim up to 150% on HMRC R&D tax relief.
Other capital allowances
You can also claim on other capital allowances, such as renovating business premises, extracting minerals, intellectual property, patents and dredging.
A business can make significant savings by understanding what capital allowances are and which purchases qualify for capital allowances.