As a business owner, every little helps, and this is why capital allowances are something worth familiarising yourself with. But what are they exactly? And can anyone claim them? We’ll cover all the bases, and explain their tax-saving potential if you buy machinery and equipment for your business.
What are capital allowances?
In simple terms, they’re a type of tax relief which businesses can claim when they invest in long-term assets. They were introduced to give businesses an incentive to invest in themselves over a longer period, benefitting the UK economy.
A long-term asset (also known as a ‘fixed’ or ‘capital’ asset) is one which a business can reasonably expect to use for 12 or more months. Things like machinery or vehicles are often used as an example.
The way it works is that claiming for capital allowances means you’re able to deduct part or all of the asset’s value against your tax bill, which in turn reduces the amount of tax you need to pay.
Depending on the type of capital allowance you claim, your tax savings may be instant in the year you purchase the asset, or spread across several years.
So, as well as claiming the cost of purchasing an asset, you can also claim capital allowances to cover the cost of maintaining it over a period of time. This is what makes capital allowances different from basic expenses, because you’re claiming the ongoing costs of owning the asset, not just the cost of buying it in the first place.
Who can claim for capital allowances?
Sole traders, partnerships, limited companies… Basically, anyone who owns a business, whether they pay Income or Corporation Tax, can claim capital allowances.
That said, the asset you’re claiming for must meet the criteria for the type of capital allowances you’re claiming.
What types of assets are eligible for capital allowances?
You can only claim capital allowances on assets you keep and use in your business, which means you must’ve purchased them.
Some of the rules sound a bit confusing, because they suggest you can claim capital allowances for lease items. This just means you can claim allowances for assets you own in order to lease out, rather than items that you’re leasing from somewhere else.
Other exemptions include assets you only use for the purposes of entertainment, in addition to things like buildings and plots of land. Typical examples of things you can claim capital allowances for include:
- Vehicles (cars, vans, trucks, etc.)
- Machinery
- Computers (plus software)
- Office equipment
- Fixtures and fittings
- The cost of renovating a building
Capital allowances can also be claimed if a business donates equipment or assets to charity.
Why is it important to claim capital allowances?
In short, doing so ultimately reduces your tax bill.
Beyond that, though, the general purpose of capital allowances is to give businesses relief from the cost of wear and tear on their capital assets, and also stimulate investment in assets that will provide a boost to productivity.
Even if you find you can’t use all of your allowance against your tax bill, you may be able to carry over whatever’s left to the following year and reduce the next year’s bill instead.
Does my accountant claim capital allowances for me?
It doesn’t have to be your accountant, and you can opt to do it yourself when filling in your tax return. It’s your responsibility to get it right!
Alternatively, you can enlist the services of a qualified accountant and have them do it for you.
Either way, it’s generally a good idea to have an expert look over your capital allowance calculations. They can be horribly complicated.
Your accountant will also be able to advise you before you make a purchase. They can walk you through the whole process and ensure you’re operating in the most tax-efficient way possible (which includes making the most of any allowances you may be entitled to), and timing your purchases to make the most of your allowances each year.
Find more help in our online accounting hub, and learn more about how to find the right accountant for your business.
