You may need to make capital expenditures while running your business. You can account for these in a different way to your day-to-day running costs, and they attract a different kind of tax relief.
If you’re planning to claim capital allowances, you should make sure you understand how the system works. Our guide below explains more.
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What are capital allowances?
Capital allowances are tax reliefs available on the purchase of assets that stay in your business. This is different to expenditure made for day-to-day running costs.
What expenditures can I claim capital allowances for?
You can claim capital allowances against assets like equipment, machinery, and vehicles. Sometimes these assets are referred to as ‘plant and machinery’.
You can also claim capital allowances against the cost of demolishing plant and machinery, and the cost of certain ‘integral features’ to a building - this includes lifts, escalators, and heating and air conditioning systems.
Alterations to plant and machinery are also included, but not repairs. Finally, you can claim against the cost of certain fixtures in buildings, including fitted kitchens.
You can only claim capital allowances against the cost of items that you buy, so you can’t claim them against those that you are leasing. Buildings, land, and structures such as bridges or docks are also off-limits, as are items that are used solely for the purpose of business entertainment.
What are the capital allowance rates?
You won’t normally have to work out individual capital allowance rates. Instead, you use a system called the Annual Investment Allowance (AIA). Provided the item qualifies for AIA (such as the items listed above), you simply deduct its value from your business profits.
The AIA is currently set at £200,000, for 12-month periods from 1 January 2016. Keep in mind the AIA changed significantly between 2008 and 2016. For information on past Annual Investment Allowances, read guidance on the .GOV site.
When you can’t use the AIA
There are cases in which you may not be able to use the AIA. In particular, if you’ve already spent more than your AIA, or if you’re claiming for a car (which can’t be claimed under the Annual Investment Allowance), you can use a system called writing down allowances.
If you’re using this system, you’ll need to separate your spending into ‘pools’, each of which attracts a different rate of relief. Read the writing down pool rates here.
What can’t I claim as capital allowances?
Business expenditure that isn’t for assets are accounted for differently. The day-to-day running costs of your business are called ‘business expenses’, and you claim relief for these in a different way. Day-to-day business expenses might include things like the cost of goods, rent, and accountancy fees.
For more information on business expenses, read our guide to self-employed tax deductible expenses.