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If you buy equipment, machinery or vehicles (known as plant and machinery) for your business, you may be able to take some of the costs away from your profits before you work out your tax. These costs are known as capital allowances.
Annual Investment Allowance (AIA) is a type of capital allowance. Read on to find out what you can and can’t claim for and the latest capital allowance rates.
Capital allowances let you claim tax relief when you buy assets to keep in your business. They’re a different type of spending to the kind you do on day-to-day running costs.
If your income is less than £150,000 a year and you’re a sole trader or a partner, you may be able to use the cash basis system instead. Cash basis accounting means you only have to declare money when it comes into or out of your business.
You don’t pay income tax on money you didn’t receive in your accounting period.
According to gov.uk, you can claim for plant and machinery, which includes:
When you claim capital allowances, it doesn’t matter whether you own or rent the building. However, you can only claim for items you bought.
If you buy your premises from a previous business owner, you can only claim for things they claimed for. So it’s important to agree the value of the fixtures and integral features during the sale process. This also allows the seller to account correctly for them.
You can also claim ‘enhanced capital allowances’ for certain energy and water efficient equipment, such as zero-emission goods vehicles and some cars with low CO2 emissions.
This will usually be the amount you paid for the item. If you owned it before you started using it in your business, or if it was a gift, you should use the market value.
Buildings and land structures don’t qualify as capital allowances. These include doors, gates, shutters, mains water and gas systems, bridges, roads, and docks.
You can’t claim capital allowances for things you lease, either, or for things you only use for business entertainment. Gov.uk gives the examples of a yacht or a karaoke machine.
You’ll only be able to claim for things if your business qualifies as a furnished holiday lettings business, or if the thing you want to claim for is in a common area of a residential building. This might include a table in the hallway of a block of flats.
Also, see gov.uk for the special rules on capital allowances if you run a care business.
You can claim AIA on most plant and machinery. This means you can deduct the full cost of the item from your profits before you work out your tax.
A new AIA allowance kicks in each time you enter a new accounting period, and if you spend more than the AIA amount, you can claim writing down allowances on that extra spending.
Claiming for cars, things you owned for a different reason before you started using them in your business, or things that were given to you or your business, needs to be done via writing down allowances instead of AIA.
It’s worth noting that the AIA amount has changed a lot since 2008, so it’s a good idea to keep up to date with the latest AIA rates on gov.uk.
Other things which you wouldn’t be able to claim as capital allowances include day-to-day running costs, things you buy and sell as part of your business, and interest payments or financing costs related to buying business assets.
Read our article to find out what you can claim as tax-deductible expenses.
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