Normally with business expenses you would claim the amounts you have paid in the tax year you made the payments in. Some items, such as vehicles and other business assets are not treated in this way and are instead claimed as capital allowances.
Capital allowances are a way of taking the cost of items that you are expected to get several years use out of, like assets, and spreading that cost over the assets’ useful life. There are a variety of rules on how capital allowances can be claimed in order best reduce your tax bill. In this blog we will be discussing the main types of capital allowances you can come across. Capital allowances can be claimed by both self-employed businesses such as sole traders, or incorporated businesses such as limited companies.
Writing Down Allowance (WDA)
WDA is the main capital allowance that can be claimed. This works by claiming 18% of the cost of your asset each year. For example for a van that costs £1,000 you would claim £180 as capital allowances. Once you have claimed your WDA, the remaining balance of the asset’s cost is carried on to be used next year.
From the above example, when the next tax year comes you would take the remaining £920 as the figure you claim 18% of. This gives a WDA of £166, rounded up to the nearest pound. The remaining £754 will be carried on to the following year.
Some assets, such as certain cars, long life assets, integral features and thermal insulation are claimed at a rate of 8% of the cost per year. These rates are subject to change so it is advised to double-check before you claim the allowances.
Normally you would keep all 18% and 8% WDA assets in groups known as ‘pools’ rather than record each asset separately. 18% assets are kept in what is known as the ‘main pool’ while 8% assets are kept in what is known as the ‘special rate pool’.
Annual Investment Allowance (AIA)
AIA allowance lets you claim all of the cost for assets in the year they were purchased, up to a limit. The current limit is for up to £500,000 worth of business assets, so if you have paid up to £500,000 on business assets you can claim 100% of the cost providing you do it in the year of purchase. This limit varies greatly each year, so be sure to double-check the limit for the year you are looking at before you claim the allowance.
You cannot claim AIA on cars, however you can claim it on almost any other type of asset providing you specifically bought it for the business. This means assets transferred or donated to the business cannot have AIA claimed on them.
AIA does not distinguish between main pool and special rate pool assets. Generally to ‘accelerate’ the overall claim of capital allowances it is preferable to claim AIA on special rate pool assets first. AIA assets are grouped together in a pool separate from the WDA pools.
If you do not claim AIA for your assets they become subject to WDA instead.
First Year Allowance (FYA)
FYA is available to certain assets that are usually environmentally friendly, such as zero emission vehicles bought brand new or energy efficient equipment. Assets eligible for FYA can have their costs claimed at a rate of 100% of the cost.
Unlike AIA there is no limit to the total cost that can be claimed with FYA. FYA assets are kept in a pool separate from the other assets mentioned above.
Small Pools Allowance (SPA)
When the remaining balance of either the main or special rate pools is £1,000 or less before you start claiming capital allowances, you can claim SPA. SPA allows you to claim the entire remaining balance of the pool instead of using the rates for WDA.
The pool that you have claimed SPA on will still remain, except the balance will be zero, until you purchase more assets.
Capital Allowances for Cars
Cars are an unusual case for capital allowances and are therefore kept in separate pools for each car. The reason cars are unusual is that how you treat them depends on the CO2 emissions of the car if it was purchased after year beginning in April 2009.
Cars will be charged at the special rate of 8% if they have CO2 emissions greater than 130 grams per kilometre (g/km), 18% if the emissions are 130g/km and 100% if the car is brand new with emissions below 75g/km.
For cars bought before April 2015 but after April 2013 the lower emission limit is 95g/km. For cars purchased before April 2013 the emission limits are changed to 160g/km and 110g/km respectively. Cars cannot have AIA claimed on them.
Other vehicles such as vans and lorries do not follow the rules for cars and instead are treated like regular business assets.
Disposing of an asset
If you sell a business asset that you are claiming capital allowances for, you need to subtract the amount you have received from the asset pool that the asset you sold came from.
If the asset sold is the only one in its pool, then you may have a balancing charge or allowance to account for.
If there is a value remaining in the pool, you can claim this as a capital allowance, or balancing allowance. For example if the pool has £2,000 remaining and you sell the asset for £1,500, you subtract £1,500 from the £2,000 and you can claim the remaining £500 as your balancing allowance.
If subtracting the sales proceeds from the pool reduces it to a balance below zero, this amount is added to the company’s profits rather than subtracted and is a balancing charge. If in the above example the original balance was £1,250 and you subtract £1,500 proceeds you would add £250 to your taxable profits.
Private use on business assets
If you have assets that are used for personal reasons, such as making personal journeys with a car, you need to reduce the amount of capital allowances claimed. This is done by applying an appropriate percentage for how much business use the asset has, for example if you use it equally for business and personal use then you would apply 50%.
Next you calculate your allowance as normal, such as £2,000 at 18% for £360. Next you subtract 50% for your personal use making the £360 into £180. This makes your capital allowance for the asset £180, however you still subtract £360 from the £2,000 to give a balance of £1,640 to carry on to next year.
This private use adjustment is applied to all types of allowance if there is any personal use on the assets. Assets that have personal use are kept in separate pools to other assets.
What if claiming capital allowances this year doesn’t help me?
Claiming capital allowances is completely optional, meaning that if claiming them does not help your tax you can save them to use in a future year where they can help you save tax. This is more important for sole traders, who will not want to reduce their profits if they are within the annual personal tax free allowance.
Normally you would claim the capital allowances if they reduce taxable profit, or increase a loss. You can even just claim part of your allowances, for example if you calculate a WDA of £150 you can claim £50 and add the remaining £100 back to your pool’s balance.
Be aware that AIA can only be claimed in the year that you purchase an asset, so choosing to not claim AIA will mean you can only claim the appropriate WDA or SPA on it in future years.
Balancing allowances and charges should be accounted for if they apply as they involve closing the asset pool.
HMRC have more in depth information on capital allowances that can be reached via this link.
If you would like any further advice or assistance on capital allowances, or tax calculations in general please do not hesitate to contact us.