Name: Aileen Gates
Company: Campbell Dallas
Aileen Gates is a partner at Campbell Dallas, Chartered Accountants. Email Aileen with your financial queries and she will answer in following issues of BWS magazine. e: firstname.lastname@example.org
The Time to Consider Capital Allowances is now
Capital Allowances are often missed by small businesses but could provide a generous tax break on investment in plant and machinery. The current regime means that 100% allowances are available to most small businesses.
How do capital allowances work?
When buying plant and machinery for your business, you cannot deduct this expenditure as an expense in arriving at taxable profits for the year in which the purchase is made. Without capital allowances, businesses would not get any tax relief on plant and machinery until the asset was eventually sold. Claiming capital allowances is a way of spreading the tax relief and allows a business to claim a deduction reflecting the falling value of the asset over time.
What counts as plant and machinery?
Any asset owned by the business will qualify for capital allowances if it is:
- movable plant used in the business or,
- an integral feature in the business premises.
Assets such as land and buildings, including doors and mains water and gas systems are not counted as plant and machinery. If you are a sole trader and use the asset for both personal and business use, capital allowances can be claimed on the business use part of the asset.
Rates of capital allowances
Capital Allowances can be claimed at either 18% or 8% per year, on a reducing balance basis. The rate of allowance varies depending on the type of asset.
In some instances, it is possible to claim 100% of the cost of an asset in the year of purchase. This can be done by utilising the Annual Investment Allowance and Enhanced Capital Allowances.
Annual Investment Allowance (AIA)
AIA can be claimed on expenditure up to a total of £500,000 per year on plant and machinery. Note that cars used in business, although eligible for capital allowances, are not eligible for AIA.
The AIA limit has varied over the last 5 years and is now at the highest it has ever been. It is important to utilise this allowance as soon as possible as the level will reduce to £200,000 from 1 January 2016. Care must be taken in dealing with the transitional rules where an accounting period runs over this date.
Enhanced Capital Allowances (ECA)
Purchases eligible for ECA can also attract a 100% deduction from your taxable profits. This can be claimed in addition to the AIA and does not count towards the AIA limit.
ECA can be claimed for energy and water efficient equipment which features on HMRC’s Energy Technology Product List and can be claimed on low emission cars. Examples of purchases eligible for ECA include energy efficient boiler equipment, hand driers, refrigeration equipment and taps.
If you think you have incurred expenditure which could have been eligible for capital allowances but you have not claimed – it’s not too late. So long as you still own the asset you can claim capital allowances after purchase.
Campbell Dallas would be pleased to provide these services to you.
If you would like to explore this issue further or have any general tax questions, please do not hesitate to contact Aileen Gates at email@example.com or telephone us on 0141 886 6644