Writing down and Annual Allowance – The principles
In this article, we look at the two ways of writing down your capital expenditure on assets, as part of your Corporation Tax return – either through Annual Investment Allowances or Capital Allowances.
Expenses you incur in your business will be one of two types –
- Revenue (trading) expenses – such as rent, payroll and advertising
- Capital expenditure – things with a lasting benefit, for example, plant, vehicles or machinery.
There is a basic principle in taxation called matching, whereby revenues and expenses are matched against each other. Since capital items last a long time, the expense is not allowed n one go, as it is for trading ecxpenditure. Instead the allowable cost is spread over a period of time by using a capital allowance.
What is the Annual Investment Allowance?
Despite the general “matching” principle referred to above, the Government allows a one off deduction to incentivise investment. This is called the Annual Allowance. The Annual Investment Allowance (AIA) gives you 100% tax relief on the cost of assets qualifying as plant and machinery, up to a maximum amount, currently set at £1,000,000 per annum.
The AIA arrangement excludes cars and assets which you previously owned and used for other (e.g. personal) purposes.
What are Capital Allowances?
These are allowances that you claim outside your AIA. You might claim these because
- you’ve reached your £1million AIA limit
- you’ve acquired assets that lie outside the remit of the AIA
Can I claim Capital Allowance on all capital expenditure?
No. Capital allowances are only claimable on certain types of asset that you buy.
- Generally speaking, you have to own the asset on which you’re claiming allowance. If you hire or lease it, then you can’t claim (although you’ll be gaining tax relief anyway, as the cost will be part of your overheads – revenue expenses).
- What about assets acquired on hire purchase or finance leases? Even though legal ownership doesn’t pass to you until your final payment, as long as you’re using the asset, then you can claim allowance against it.
- Typically, these are the types of asset against which businesses can claim capital allowances –
- Motor vehicles*
- Computer equipment
- Plant and Tools
- Specialist machinery
- Fixtures, fittings, furniture (for example, a store re-fit)
- Commercial property
- ‘Integral Features’ (items or systems that can’t easily be removed) within a property (including residential), such as lifts, escalators, water, heating, ventilation, electrical and lighting systems.
*Where a car bought as a business asset is also used for private purposes (which is often the case), you can’t claim allowance for the personal use element.
Let’s say 25% of your car mileage is for personal use, and the capital allowance for your car is calculated at £2,400, then you would claim for 75% of this amount, £1,800, for the business usage of the car only.
What percentage of the value of the asset can I ‘write down’?
If you’re claiming as part of your AIA, then you can deduct 100% of the value of the asset from your nett profit.
If you’re claiming or ‘writing down’ as part of your Capital Allowance, then the percentage varies, depending on the nature of the asset – see below.
How to claim your Capital Allowance
First, calculate the value of your item. This will be what you paid for it.
Next, place the assets you’re claiming against into separate ‘pools’, depending on the rate they qualify for. There are three types of pool –
- Main pool with a writing down allowance rate of 18%. The value of all plant and machinery you’ve bought, unless they’re in
- the special rate pool
- a single asset pool (for example, because you have chosen to treat them as ‘short life’ assets (see below) or you’ve used them outside your business)
You would include in your Main Rate Pool assets that you expect to have a life of at least 25 years, up to a maximum value of £100,000.
- Special rate pool with a rate of 6%
- parts of a building considered integral (known as ‘integral features’)
- items with a long life
- thermal insulation of buildings
- cars with CO2 emissions over a certain threshold
- You can claim annual investment allowance (AIA) on these items apart from cars
You would include in your Special Rate Pool, assets that you expect to have a life of at least 25 years, that you value at over £100,000.
- Single asset pools with a rate of 18% or 6% depending on the item
You might need to create one or more separate pools for single assets that have a short life. Examples might include plat or machinery that you plan to re-sell with 8 years.
Large numbers of very similar items can be pooled together (for example, crockery in a restaurant).
Essential guidance on Capital and Annual Investment Allowances.
Writing down and Annual Allowance – The principles In this article, we look at the two ways of writing down your capital expenditure on assets, as part of your Corporation Tax return – either through Annual Investment Allowances or Capital Allowances. Expenses you incur in your business will be one of two types – Revenue […]