06. Sep 2019 |

What Capital Allowances Can I Claim?

What’s your next investment? Let’s guess, a new SUV or should we say the next-generation Samsung Galaxy S10! All this is to better your life, but are you aware of the role capital allowances play when it comes to such investments!

Capital Allowances
The rule states that one is only to claim capital allowances on goods owned. (© Pexels)

These assets you’re looking to invest in mostly tax-deductible. Nonetheless, you might think that HMRC takes the same approach to these purchases as it does with your everyday expenses like office utilities. Seemingly, that’s not the case. Wait, you can’t go ahead and deduct the payments from your income. For this to be realized, you’re required to claim capital allowances.

In this article, we’re going to look closely at what capital allowance is all about. By the end, you’ll be in a better position safely to approach capital allowances in the UK.

What are Capital Allowances?

Are you familiar with these terms? Well, capital allowance is an approach to reducing the tax bill incurred whenever you settle for purchases that will be of great benefits to your business in the long run. Technically, it’s referred to as capital expenditure.

Capital expenditures come about whenever you:

  • Purchase essential assets that will be of benefit to your business. This is usually referred to as a capital asset.
  • Spending on your business facelift.
  • Expenses on maintaining capital assets.

What Qualifies for Capital Allowance?

This has been a debate for days. Sadly, there aren’t any robust rules that govern this in terms of assets that qualify for capital allowance. As per the HMRC’s guidelines, it all comes down to the specific business and the circumstances surrounding it. Seemingly, what another business counts as an asset for capital allowance, might not necessarily apply to another company.

However, with that in mind, you can always count on capital assets as:

What your business needs: let’s take, for instance, a business person who runs a retail shop. The computing machines for recording the buying and selling data are counted as a capital asset. By contrast, if you’re a teacher, a computing machine wouldn’t be counted as a capital asset, even if it’s used to keep records of your valuable information.

The expense isn’t absolute: as per the HMRC’s latest toolkit, there isn’t any specified limit to which costs become capital assets. It all comes down to the size of your business. In a much broader sense, an investment worth $123 could be valued as a capital asset for a one-person operation working from your backyard. However, the same investment count is evaluated as an everyday expense for a billion-dollar company.

Long-term benefits to your operation: this is somewhat relative in the sense that it lacks exactness. In as much, a business operator ought to be in a position to make use of their assets for at least a year.

Of note: The HMRC guidelines boldly state the instructions on some of the assets a business owner can and can’t claim capital allowances.

Examples of Capital Allowances Claims

Top of the list is plant and machinery, which is the most common. When it comes to the types of equipment, you’re looking at the automobiles and machinery used. For instance, a merchant who runs a delivery company? Here the plant and machinery would entail the tools used to ferry the goods within the stores and the automobiles used to deliver the rights to your clients.

They also entail:

  • The expenses involved in bringing down pieces of equipment and machinery
  • Components of a building: the escalators and the walkways, the cooling systems, the lighting systems, etc.
  • And the fixtures

Besides plant and machinery, one can also claim capital allowances on:

  • Intellectual property
  • Patents: regularly, a license recognizes the business person as an investor. This grants you the freedom of using the invention as you please
  • Research and development
  • Renovation of business premises
  • Dredging for the sipping business

The list is endless, but you can go ahead and check out the HMRC’s latest toolkit for more details on the same.

When is One Allowed to Claim Capital Allowances?

The rule states clearly that one is only to claim capital allowances on goods owned. If you go ahead and rent an automobile for your activities, the cost incurred would’ve to e deducted from your everyday expenses. Nonetheless, keep in mind that HMRC gives room for expenses incurred on some leasing arrangements (hire purchase), in such events; one is free to claim capital allowances.

The HMRC has also restricted capital allowance claims on;

  • Land and structures like bridges
  • Investments used entirely for entertainment (that pool table by your workplace is free from capital allowance claims)
  • Buildings and all its construction components

The annual investment allowance

This allows you to go ahead and make a deduction of the full value of plant and machinery that qualifies for annual investment allowance (AIA) . This goes up £1 million/year (1 January 2019 – 31 December 2020). However, there is a set rule governing this in that the claim is only valid within the year of purchase.

Writing down Allowances

This writing down allowances can also be claimed in the event you exceed the set annual investment allowance. Like we earlier on mentioned, the limit is £1 million so you’ll have to exceed this within a year if the item claimed isn’t covered under the annual investment allowance.

However, it usually doesn’t include:

  • Cars, for they have slightly different rules which call for a separate calculation other than the other plant and machinery.
  • Items purchased before starting the current business. Let’s say you used your music equipment to play loud music. You then decide to start a sound business and use the same music equipment. This equipment will be excluded in the annual investment allowance.

Keep in mind that you can only claim a certain percentage of the item’s value as the writing down allowance.

How is the writing down allowance claimed? One is expected to:

  • Come up with the item’s value, the purchase amount. For gifts and other items initially owned, you’ll have to find out the market value
  • Place the subject as the three HMRC pools. Main rate pool –default, Special rate pool –building components and Single asset pool –short lifespan items.
  • Calculate the percentage per the pools: 18%, 8%, and 18% or 8% yearly respectively.
  • For sole traders, be on the lookout to deduct personal use from the final result.

Conclusion

This is all you need for your capital allowances information. However, take your time and go through the HMRC’s latest toolkits to be versed with the rules and updates. Go for capital allowances today and enjoy the full benefits.

Are you having trouble with the writing down allowances? What’s your primary concern?

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