Capital allowances are claimed when assets are purchased for business use. These are items that will be kept in the business on a long term basis such as computers, office equipment or cars.
When purchasing an asset, the cost is not considered as a trading expense and therefore will not reduce the business’ trading profit. However, when corporation tax is calculated, capital allowances can be claimed in order to reduced the taxable profit and receive tax relief on the cost of the asset.
Capital allowances can only be claimed for assets that the business owns, not leased. Buildings, land and assets used for business entertaining also don’t qualify.
How much are capital allowances?
There are 3 types of capital allowances. We will automatically claim capital allowances in the most tax efficient way.
First Year Allowances
The full cost of the asset is deducted from taxable profits when calculating corporation tax.
This applies to assets which are classed as energy and water efficient equipment.
New cars with CO2 emissions below 50g/km or pure electric cars attract first year allowances.
Annual Investment Allowance (AIA)
The full cost of the asset is deducted from taxable profits when calculating corporation tax.
This applies to most business assets but excludes cars.
The AIA is currently £1m, to December 2021.
Writing Down Allowances
Writing down allowances apply to assets purchased above the AIA and cars.
The amount which can be claimed is either 18% or 6% per year. This is applied on a reducing balance basis.
The rate applied depends on the type of asset. For cars, the CO2 emissions will determine the rate of capital allowance.
If capital allowances are claimed and the asset is sold, there may be a balancing charge or allowance based on the sales proceeds and a tax adjustment will be made accordingly.
Super Deduction
The Government are introducing a super deduction from 1st April 2021. Father than claiming the full cost of the asset against taxable profits, this is increased to 130% providing further tax savings when investing in business assets.