When you buy certain things (assets) for your business, such as computer equipment, your company can claim ‘capital allowances’ on the value of these assets – and deduct the value from your profits before tax is calculated.
In this guide, Joanne Harris, Technical Commercial Manager at Nixon Williams, shares her expertise on capital allowances and how they work.
Any relevant assets must have a purely business use
For a business to utilise capital allowances, the assets purchased must be used for business purposes with any personal use being incidental. If there is significant personal usage of the asset, it will be taxable on the individual as an employment benefit. For example, if a contractor purchased a company car, there would be a benefit in kind charge to consider.
Each year, a business will need to report and pay tax on any employment benefits on a P11d form. The benefit in kind charge is calculated at 13.8% of the cash value of the asset and is payable by the company. The cash value of the benefit will also be included as employment income on the employee’s self-assessment tax return.
Capital allowances can be complicated and the way that tax relief is claimed will differ depending upon the type of asset. For example, company cars will be subject to very different treatment to computer equipment.
Annual Investment Allowance
The Annual Investment Allowance (AIA) was introduced in 2008 to help boost economic growth in the UK. It means businesses can deduct the full value of an item that qualifies as ‘plant and machinery’ from its profits before tax in the year of purchase.
The AIA amount has temporarily increased to £1 million between 1 January 2019 and 31 December 2020. The maximum amount of relief available is based on an annual expenditure limit, although this has fluctuated in recent years as shown in the below table
|Maximum annual allowance (£)||Period qualifying expenditure incurred|
|1,000,000||On or after 1 January 2019|
|200,000||1 January 2016 until 31 December 2018|
|500,000||6 April 2014 (1 April 2014 for companies) until 31 December 2015|
|250,000||1 January 2013 until 5 April 2014 (31 March 2014 for companies)|
|25,000||6 April 2012 (1 April 2012 for companies) until 31 December 2012|
AIA must be used in the period that it relates to and cannot be carried forward, and only one AIA is available per business each year. A group is treated as one business for AIA purposes, with companies under common control also treated as one business.
In practice it is unlikely that you will come close to these limits as a contractor. It’s also important to note that vans and motorcycles do qualify for annual investment allowance.
First year allowance
Enhanced capital allowances (a type of first year allowance) can be claimed for some cars with low CO2 emissions amongst other things. It works in a similar way to AIA, however it does not count towards the AIA limit.
Writing down allowances
Assets that do not qualify for AIA or First Year Allowances will still qualify for tax relief in the form of writing down allowances. This is recalled in a different way to AIA and FYA in that the amount available for tax relief is a percentage allowance of 18% or 6% per year.
VAT – Flat Rate Scheme
If your company is registered for the standard VAT scheme, it will be able to reclaim the VAT charged on any capital items it purchases.
However, things are different if your company is registered for the flat rate VAT scheme. Under this scheme, which aims to make VAT simpler for smaller companies, businesses pay roughly the same amount of VAT as those on the standard scheme without having to complete as much paperwork as other VAT schemes.
However, unlike the standard scheme, businesses paying a flat rate cannot usually reclaim VAT on purchases.
Fortunately, there is an exception for capital expenditure above £2,000. In this instance, computer equipment would fall into this category and VAT can be reclaimed.
HMRC’s help sheets HS222 and HS252 provide gives further information about capital allowances and there is further information on the HMRC website.