Capital Allowances in Ltd Companies

1. Overview

What is capital?

Depending on the nature of your business, it may have or build up ‘capital’ (sometimes known as ‘fixed assets’), which is equipment used to run your business. This might be a van, laptop, office furniture, premises (that are owned by the company) or tools – these are known as ‘plant and machinery’.

You can claim capital allowances when you buy assets that you keep using in your business, for example:

·        equipment

·        machinery

·        business vehicles, for example vans, lorries or cars

These are known as ‘plant and machinery’.

You can deduct some or all the value of the item from your profits before you pay tax.

Work out the value of your item

In most cases, the value is what you paid for the item. Use the market value (the amount you’d expect to sell it for) instead if:

·        you owned it before you started using it in your business

·        it was a gift

Other capital allowances

As well as plant and machinery, you can also claim capital allowances for:

·        renovating business premises in disadvantaged areas of the UK

·        extracting minerals

·        research and development

·        ‘know-how’ (intellectual property about industrial techniques)

·        patent rights

·        dredging allowances

·        structures and buildings

What does not count as plant and machinery

You cannot claim plant and machinery allowance on:

·        things you lease - you must own them

·        items used only for business entertainment, for example a yacht or karaoke machine

·        land

·        structures, for example bridges, roads, docks

·        buildings, including doors, gates, shutters, mains water and gas systems

2. Annual investment allowance

You can deduct the full value of an item that qualifies for annual investment allowance (AIA) from your profits before tax.

If you sell the item after claiming AIA you may need to pay tax.

What you can claim on

You can claim AIA on most plant and machinery up to the AIA amount.

What you cannot claim on

You cannot claim AIA on:

·        business cars

·        items you owned for another reason before you started using them in your business

·        items given to you or your business

·        Claim writing down allowances instead.

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 6% 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 from 1st April 2018:

The AIA amount

The AIA amount has temporarily increased to £1 million between 1 January 2019 and 31 March 2023.

You get a new allowance for each accounting period.

130% “Super-Deduction’’ And 50% First Year Allowances

From 1 April 2021 and 31 March 2023, companies will be able to claim a 130% deduction for most new plant and machinery, excluding cars. Under current rules, businesses can claim an ‘annual investment allowance’ which effectively gives a 100% deduction on expenditure up to a maximum of £1m p.a., and a writing down allowance of 18% p.a. on the excess. Whereas, this new relief allows a 130% deduction in the year of expenditure, without a maximum cap.

Other capital expenditure currently qualifying for the annual investment allowance and a ‘special rate’ allowance of 6% p.a thereafter, such as heating, electrical and air conditioning systems, will qualify for a first-year allowance of 50%.

There are exceptions though- for instance:

·        This new super deduction cannot be claimed against the purchase of used or second-hand assets.

·        Or for expenditure where contracts were entered into prior to 3 March 2021 (i.e. businesses cannot claim this new deduction if they had already committed to the expenditure prior to the Chancellor’s budget).

·        This allowance will be available on assets acquired through hire purchase contracts, but there are additional considerations for assets acquired through other types of leases, therefore advice should be sought on these areas.

When you can claim

You can only claim AIA in the period you bought the item.

The date you bought it is:

·        when you signed the contract, if payment is due within less than 4 months

·        when payment’s due, if it’s due more than 4 months later

·        If you buy something under a hire purchase contract you can claim for the payments you have not made yet when you start using the item. You cannot claim on the interest payments.

3. How to claim

When you’ve worked out your capital allowances, claim on your:

·        Self-Assessment tax return if you’re a sole trader

·        partnership tax return if you’re a partner

·        Company Tax Return if you’re a limited company - you must include a separate capital allowances calculation

4. Conclusion

The business can benefit greatly from these increased allowances highlighted above. This encourages business to invest in Fixed assets and give green light to long awaited renovations. Effectively business can reduce their taxable profits greatly by claiming these allowances and paying a special rate.