What are Capital Allowances?
You can claim Capital Allowances tax relief on larger items that you buy to use in your business. These can be actual items, like machinery, vehicles or equipment; or intangible things, like patents, or intellectual property.
The Tax Office calls all of these things Capital Expenditure, hence Capital Allowances. Think of them as more ‘one off’ purchases, rather than your day-to-day running costs (HMRC calls the latter ‘business expenses’). The system allows you to take away the cost of this ‘capital expenditure’ from your profit total, before you pay tax.
Capital allowances can be claimed to give you tax relief on the cost of capital expenditure incurred to do your job or run your business.
Taxpayers are allowed to reclaim the amount, or remove the value of these items from their gross pay or profit. They are a really important way of reducing your tax bill now and in the future. In many cases capital allowances can also mean you are owed a tax rebate from past tax years.
Who can claim?
PAYE employees, sole traders, partnerships and limited companies are all entitled to claim for capital allowances.
PAYE and capital allowances
If you are employed you can claim capital allowances. It is often thought that only the self employed and businesses can make use of capital allowances.
An example:
An employed mechanic buys tools and a tool box to enable him to perform his duties. His tools and tool box are classed as plant and machinery and because of this he can claim capital allowances on the value of his qualifying purchases. In this example the mechanic will overpay tax and be entitled to a tax rebate on his tools.
What is covered under the ‘capital allowances’ scheme?
There are a number of business purchases that you can claim for including:
- Plant and machinery: This includes various tools, machinery, and equipment.
- Vehicles like a car or van (Not available for PAYE employees)
- Computer and other office equipment
You can find a complete list at HMRC.
Capital allowances timescales
The timescale depends on whether you have completed a Self Assessment tax return in the year of claiming.
PAYE claim
You can claim capital allowances at a date you choose but if it’s not claimed within the last four tax years you will lose the option to claim 100% of an assets value in the year it is bought.
Self Assessment
If you completed a Self Assessment tax return you need to include any capital allowances on your tax return in accordance with the normal Self Assessment deadlines.
Valuing your assets
Under the capital allowances rules you need to value the asset. If you purchased the item, then its value is whatever you paid for it. If you previously owned it (i.e. before it became a business asset), or it was a present, then its valued at its resale amount.
Annual Investment Allowance
The annual investment allowance can be used for plant and machinery items and allows for 100% of the cost to be taken from you profits before tax. You can only use the AIA in the year that you buy the asset. If you are claiming capital allowances as an employed person this would normally be the way you would claim.
AIA Qualifying Items
Apart from some items like gifts or pre-owned items (owned before use in business), most plant and machinery items qualify for AIA. The items exempt from AIA can usually be claimed for under a first year allowance.
Writing down allowances
If you reach the AIA total allowed or the item does not qualify for AIA, then you can use the ‘Writing down allowances’ system. This only allows you to deduct a percentage of the item’s value from your profits before tax. (The AIA system allows the full cost to be taken off.)
“Writing down allowances” give a standard rate and are used for most cars and anything else you didn’t claim AIA or first year allowance on.
You can claim these allowances if you don’t want to make a claim for the full cost either as a full or split (with AIA) claim.
If you choose you can have a percentage of the remaining value of the asset each year until the asset is used up.
The tax office needs to see a capital allowance schedule which shows how the writing down allowances have been claimed. The figures are entered into what are called pools which have different values.
Special rate pool = Value of the asset @ 8% per year
Main rate pool = Value of the asset @18% per year.
First Year Allowances
In the same way as the AIA the first year allowance can be claimed on the full qualifying cost of the item and can only be claimed in the year the asset is bought.
First year allowances qualifying items
A first year allowance is allowed in general on energy saving plant and machinery, most vehicles, and R&D capital expenditure.
Dual purpose items
You can make an AIA claim that is proportional to the items’ usage, if you are a partner or a sole trader.
For example:
You spend £1,500 on tools, but spend about 50% of the time using them for home projects. You simply apply for 50% of the capital allowances amount.
How to claim capital allowances
Employees under PAYE
For any amount up to £2,500 correspondence with supporting evidence will need to be submitted to the tax office. Anything worth £2500 or over should be claimed on a Self Assessment tax return.
Limited Company
You need to produce a capital allowances calculation separately to your other financial documentation.
Partnerships
You submit a claim on your Partnership Tax Return.
Sole Trader
You apply for Capital Allowances on your Self Assessment tax return.
