Thinking of investing in a new laptop? Of buying a business vehicle? Or of getting some other piece of equipment you need for your business or to help it operate more efficiently? These purchases are usually tax-deductible. But HMRC doesn't treat them the same way they treat day-to-day expenses such as business mileage and office utilities. You can’t just subtract the cost from your income. To get your tax deduction, you’ll have to claim capital allowances.Here’s a rundown of what capital allowances are and how they work in the UK.
Capital allowances are a way of reducing your tax bill when you spend money on something that’ll benefit your business in the long term. This is called capital expenditure.You make capital expenditure when you:
Unfortunately, there are no hard and fast rules. According to HMRC’s latest toolkit, it depends on your business and circumstances. What might count as a capital asset for one business won’t necessarily count for another.That said, a capital asset will usually be something that:
So, if you run a tailoring shop, your sewing machine would be a capital asset. By contrast, if you’re a baker, a sewing machine wouldn’t count as a capital asset, even if you use it to mend your aprons
HMRC don’t have a specific threshold above which an expense becomes a capital asset. It depends on the size of your business. A piece of equipment worth £150 could be a capital asset if you’re a one-person operation working from your basement. But the same purchase could count as a day-to-day expense for a multi-million pound company.
Again, there’s no exact definition of ‘long-term’. That said, as a rule, you should be able to use a capital asset for more than a year.
No. Not every capital asset qualifies for capital allowances. Luckily, HMRC has rules on which assets you can and can not claim capital allowances on.
Plant and machinery is the most common type of asset you can claim capital allowances on. It’s equipment, machinery or vehicles that you use in your business. So, if you run a delivery company, plant and machinery would include the forklifts you use to stack goods in your warehouse and the vans your employees use to deliver goods to your customers’ premises.Plant and machinery also include:
You can claim capital allowances only on things you own. So, if you rent a van, you’d have to deduct the rental cost from your day-to-day expenses (do note, however, that HMRC allows you to claim capital allowances on some leasing arrangements, such as hire-purchase).Also, you can’t claim capital allowances on:
You can claim capital allowances in one of two ways: through the annual investment allowance or through writing down allowances.Let’s have a look at each in turn.
The annual investment allowance allows you to deduct the full value of plant and machinery, up to £200,000 per year. The catch is that you can claim it only in the year you bought the equipment.
Let’s say you’re a baker. In 2018/19, your total taxable profit (that is, your profit after allowable expenses) is £50,000.
During the year, you invested in three ovens, each worth £1,500. You also bought a van for deliveries. This cost £10,000.
In total, you spent £14,500. This is much lower than the £200,000 annual investment allowance limit. So, you can deduct it from your total taxable profit for the year.
As a result, you’d pay tax on £35,000 instead of £50,000.
However, if you don’t claim the £14,500 in 2018/19, you lose it.
You can claim a writing down allowance if:
You can claim only a percentage of the item’s value as a writing down allowance each year. That said, you can keep claiming writing down allowances until the item’s value reaches zero. The amount your item is worth after you claim a writing down allowance is called a closing balance.
To claim a writing down allowance, you’ll have to:
Let’s say you spent £230,000 on capital expenditure in 2018/19. All of these expenses qualify for the annual investment allowance. However, you’ve exceeded the £200,000 limit, so you have to claim the extra £30,000 as writing down allowances.
All the £30,000 falls in the main rate pool. This means you can claim a writing-down allowance of 18 percent. None of the items is a car, and there is no personal use.
Yes. Plant and machinery aside, HMRC also allow you to claim capital allowances on:
Two things might happen if you sell a capital asset. Firstly, you may have to pay capital gains tax. And, secondly, you may have to add a balancing charge to your profits in the year you sell.Let’s have a look at each in turn.
You have to pay capital gains tax if:
The current capital gains tax rates are:
Let’s say you’re a sole trader. A few years ago, you bought equipment worth £8,000 for your business.
In 2018/19 your total taxable profit was £30,000, which means you’re a basic rate taxpayer. You also sold your equipment for £14,000.
£14,000 is £2,300 over the £11,700 annual exempt amount. So, you’ll need to pay capital gains on this amount. Since you’re a basic rate taxpayer, you’d pay capital gains at 10 percent, that is £230.
Unfortunately, capital gains tax isn’t the only money you might have to fork out if you sell a capital asset. You may have to pay a balancing charge if:
Let’s say you bought equipment worth £8,000 for your business.
In 2018/19, your total taxable profit is £30,000. You also sold your equipment for £6,000.
Since you sold the equipment for less than you bought it for, you don’t have to pay capital gains tax.
That said, you claimed £7,000 in writing down allowances over the years. So, you have to add a £1,000 balancing charge to your profits.
As a result, your total taxable profit for 2018/19 would go up from £30,000 to £31,000.