Tax and NI

7. Capital Allowances

Whether you are self-employed or trading as a limited company, you cannot count the full cost of purchasing or improving premises and equipment as an expense. Instead you have to claim a 'capital allowance', which is then set off against your profits like an allowable expense.

7.1 In most cases, capital allowances allow you to write off a percentage of the value of the asset against profits, over several years.

• You apply the percentage to the original cost in year one, and write the value of the asset down by that amount.In subsequent years, you apply the percentage to the written-down value, so that the allowance gradually declines.

7.2 Capital allowances range from 0 per cent to 100 per cent, depending on who you are and what you are purchasing.

• There are 100 per cent allowances for energy saving and environmentally beneficial equipment. Loss making businesses can surrender losses attributable to expenditure on such equipment in exchange for tax credit from the Government.
• There are also 100 per cent capital allowances for businesses purchasing low-emission cars (emitting up to 110g/km of carbon dioxide.
• There is a new Annual Investment Allowance that allows businesses to claim 100 per cent capital allowances on the first £50,000 of investment on plant and machinery (excluding cars). Expenditure over the £50,000 limit will be dealt with under the main or new special rate pools (see below). The Annual Investment Allowance replaced the old 50 per cent first-year allowance and is open to all businesses, not just small and medium-sized businesses.
• There is also a new "special rate" pool that gives 10 per cent capital allowances on integral features of buildings, thermal insulation and long-life assets.
• The allowance for qualifying industrial buildings and large hotels is 3 per cent a year, based on cost.
• Since 11 April 2007, businesses have been able to claim the Business Premises Renovation Allowance. It gives businesses in designated disadvantaged areas 100 per cent capital allowances for the costs of renovating or converting business premises that have been vacant for more than one year.

7.3 To make life simple, all equipment subject to the 20 per cent rate (except cars costing more than £12,000) is generally put into a 'pool', and capital allowances are calculated at 20 per cent of the total value.

• Each time you buy something, the cost is added to the value of the pool.

7.4 Where assets have an expected life in the business of four years or less, you can elect for them to be treated separately as short-life assets. This can accelerate tax relief.

7.5 You can choose to defer claiming capital allowances.

• The whole process of writing down the assets is simply delayed by a year, leaving their value unchanged.

7.6 If you are not registered for VAT, you can also claim capital allowances on the VAT charged on the equipment you buy.