Using capital allowances is a great way of reducing the amount of corporation tax your business has to pay. There are lots of different ways to do it as well.
Capital allowances 2020
In this article, we look the breaks that are open to business which allow them to keep more of the money they make
Annual investment allowance
|Annual investment allowance (limited companies)||Throughout 2019 and 2020||Throughout 2016, 2017, and 2018||6 April 2014 to 31 December 2015||1 January 2013 to 5th April 2014|
Annual investment allowances, also known as AIA allowances, are designed to incentivise and encourage businesses to invest in plant and machinery. From 1st January 2019, the annual investment allowance was increased to £1,000,000.
According to HMRC’s definition, plant and machinery includes:
• items that you purchase to use in your business, including cars
• costs involved in demolishing plant and machinery
• parts of a building considered integral (covered later in this article)
• fixtures, for example (fitted kitchens or bathroom suites)
• alterations you make to a building so you can install other plant and machinery
You can’t claim AIA allowance on cars, gifts, or items/assets you owned before they were used for the business.
BusinessCostSaver tip – you can allocate your AIA against any qualifying expenditure you want. You’re also able to use your allowance against assets with a lower rate of allowance. You can even also assign your AIA to any company losses. If your company loses £50,000 in a year but have AIA qualifying expenditure of £100,000 in a year, you can increase your taxable losses to £150,000. You can also carry those losses forward meaning that if you made £100,000 the following year, you could use the previous year’s £100,000 to “null” your profit, meaning that no corporation tax would be due, if you run a limited company.
Writing down allowances are used by businesses to decrease the level of profitability by claiming against the deterioration in value of assets held by the business.
We look at writing down allowances in depth in this article from this point onwards. They’re a convenient and easy way to reduce the level of tax you pay, whether you’re a sole trader, a partnership, or you run a limited company.
When planning your writing down allowances for the year, you should group the assets into three types of pools:
• a “main” pool with a writing down allowance of 18%
• a “special rate” pool with a writing down allowance of 6%
• single assets pools where the asset contained within can attract either a writing down allowance of 18% or 6%.
Each pool has a balance – that is the value of items contained within the pool. Each year, you can claim a writing down allowance against each pool based upon the assets contained with it.
If you buy something new for your company, allocate it to the correct pool and that adds to the balance. If you sell something in the pool, the value of the pool goes down by the amount you sold the item for.
You can only claim writing down allowances on items for which AIA allowances have not, or cannot, be claimed. That may be because you’ve spent more than the threshold in that year or the asset may not qualify for AIA.
First, let’s look at main rate writing down allowance assets and how they work.
Main rate writing down allowance
|General writing down allowance||2019-2020||2018-2019||2017-2018||2016-2017|
When you’re buying any asset for your business, in most cases you can take off the full value of the asset from your profits before taking using the Annual Investment Allowance mentioned earlier in this article.
Writing down allowances should be used if you’ve spent more than your AIA allowance annual limit or if what you’ve bought is not eligible for AIA.
To work out how much you can claim with writing down allowances, you need to begin what you paid for the assets. If the asset was given to your business as a gift or it’s something you personally owned before allowing it to be used by the business, the figure to start off with is the market value.
The main writing down allowance is 18% a year. Let’s look at how that writing down allowance at 18% works over a ten-year period on, for example, an IT system
|Year 1||Year 2||Year 3||Year 4||Year 5||Year 6||Year 7||Year 8||Year 9||Year 10|
|Value of asset||£10,000||£8,200||£6,724||£5,514||£4,521||£3,707||£3,040||£2,493||£2,044||£1,676|
|Value of WDA||£1,800||£1,476||£1,210||£992||£814||£667||£547||£449||£368||£302|
As you can see, in the first year, the writing down allowance is equivalent to £1,800. That means that you can take £1,800 away from your profits, meaning you pay either less corporation tax or income tax/National Insurance, depending on whether you are a limited company or not.
That reduces the value of the asset on your books from £10,000 to £8,200. So, when you claim writing down allowance for the second year, you’re able to deduct 18% of £8,200 from your profits, equivalent to £1,476.
As you can see, as 18% of the value is written off every year, that means the asset’s value decreases every year as does the amount you can deduct from your profits.
Special rate allowances
Other than the main rate of writing down allowances, there is a special rate.
The special rate is 6% and that’s the rate you have to use forL
• items with a long-life
• the thermal insulation applied to a building
• cars with CO2 emissions greater than 130g/km
• the integral features of a building.
You can also claim AIA allowances on all of the special rate items with the exception of cars. You should only claim writing down allowances on each of these items if your AIA allowance has run out that year (that is, you’ve spent more than the annual threshold on items that qualify for AIA).
Integral features writing down allowance
|Integral features writing down allowance||2020-2021||2019-2020||2018-2019||2017-2018|
You can claim a lower writing down allowance rate of 8% on what HMRC considers are integral features to a building, including:
• lifts, escalators, and move walkways
• air-conditioning systems
• air cooling systems
• space heaters
• water heating systems
• hot and cold water systems (excluding for toilets and kitchens)
• electrical systems (including lighting)
• external solar shading systems.
What effect does an 8% writing down allowance have on the amount of corporation tax you can claim back over 10 years look like:
|Year 1||Year 2||Year 3||Year 4||Year 5||Year 6||Year 7||Year 8||Year 9||Year 10|
|Value of asset||£10,000||£9,400||£8,836||£8,306||£7,807||£7,339||£6,899||£6,485||£6,096||£5,730|
|Value of WDA||£600||£564||£530||£498||£468||£440||£414||£389||£366||£344|
Long-life assets writing down allowance
|Life-long assets writing down allowance||2020-2021||2019-2020||2018-2019||2017-2018|
You can also claim writing down allowances at 6% on items which have a useful life of at least 25 years from when they are bought as new.
If you’re a sole trader or a partner, allocate your long-life assets to your special rate pool if, within your tax year, your spending on long-life assets adds up to £100,000. If that’s not the case, put them in your main rate pool if their total combined value is less than £100,000.
Single asset pools writing down allowances
Single asset pools are used for one-off, single assets which have a short life or which you don’t intend to use/keep for very long, or, if you are a sole trader or a partnership, an asset that you use outside the business for personal reasons.
You can’t create a single asset pool for a car or for any special rate items.
You can keep assets in a single asset pool for up to 8 years before you have to move them into your main asset pool.
First year allowances
You can qualify for first year allowances, meaning you can deduct the full cost of an asset from profits before tax, if you buy a qualifying asset.
Assets that qualify for first year allowances are called “enhanced capital allowances”
|Enhanced capital allowances||2020-2021||2019-2020||2018-2019||2017-2018|
The Enhanced Capital Allowances scheme was launched to promote the purchase by businesses of energy-saving plant or machinery chosen for inclusion on the government’s Energy Technology List.
The Energy Technology List has two parts to it:
• The Energy Technology Criteria List, a set of tests that qualifying products must pass, and
• The Energy Technology Product List, a register of the products that have passed the test.
Technologies and products featured on the scheme include:
• Air-to-air energy recovery.
• Automatic monitoring and targeting (AMT) equipment.
• Boiler equipment.
• Combined heat and power (CHP).
• Compressed air equipment.
• Heat pumps.
• Heating, ventilation and air conditioning (HVAC) equipment.
• High speed hand air dryers.
• Motors and drives.
• Pipework insulation.
• Radiant and warm air heaters.
• Refrigeration equipment.
• Solar thermal systems.
• Uninterruptible power supplies.
You can claim 100% of the costs you incur when purchasing equipment as part of the scheme. All you need to do is to keep the records of your purchase and hand them over to your accountant who will include them on your tax return at the end of the year.
Enterprise zone capital allowance
|Enterprise Zone allowances||2019-2020||2018-2019||2017-2018||2016-2017|
|To a limit of||€125 million||€125 million||€125 million||€125 million|
Businesses situated in Enterprise Zones (see the list here) which invest in new and qualifying plant and machinery qualify for 100% capital allowance relief against their taxable income up until 31 March 2020.
The money spent must be on new and unused plant and machinery. The plant and machinery must not be a replacement of current assets – the scheme is designed to help companies enhance both their productivity and activity.
The equipment must be bought and the company have title of the equipment. Leasing the equipment will not qualify for the enterprise zone capital allowance.
There are a number of excluded industries from the scheme including fisheries, aquaculture, coal, steel, shipbuilding, synthetic fibres, management of waste, and primary agriculture.
Business property renovation capital allowances (not open to new applicants)
|Business Property Renovation||2017-2018||2016-2017||2015-2016||2014-2015|
This scheme has ended.
The Business Property Renovation Allowance was a 100% tax allowance when:
• your company converted a building into business premises
• you renovated a building that already is or will become business premises
• you carried out repairs on business premises.
It was only available in Northern Ireland and areas of Great Britain that were considered disadvantaged.
Landlord’s energy saving capital allowances (not open to new applicants)
|Landlords’ Energy Saving Allowance||2017-2018||2016-2017||2015-2016||2014-2015|
This scheme has also ended.
The Landlord’s Energy Saving Capital Allowance was a way for a landlord to move £1,500 across from the capital to the revenue column for installing the following in a residential dwelling:
• cavity wall insulation
• loft insulation
• hot water insulation
• draught proofing,
• solid wall insulation
• floor insulation
How to claim capital allowances
When you’ve worked out what capital allowances you’re going to claim for, you must make your claim via:
• a company tax return, if you’re a limited company (you’ll need to include a separate capital allowance calculation)
• Self Assessment, if you’re a sole trader
• Partnership tax return, if you’re a partner.
On the relevant form, the amount that you’re claiming for will be deducted from your profits, meaning either lower corporation tax or income tax/National Insurance.