Tax and NI

8. Capital Allowances

When working out your profits, you cannot count the cost of purchasing premises and equipment as an expense. This is often an important consideration for start-up businesses.

Instead you claim a capital allowance, which is then deducted from your profits, like an allowable expense. This applies to both limited companies and the self-employed.

8.1 Most capital allowances are spread over a number of years, and often gradually reduce.

• Plant and machinery is the main category and the allowance is a fixed percentage of the item's value (written down for tax purposes) at the end of each year, and the value is reduced each year by the previous year's tax allowance.

8.2 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).
• The Annual Investment Allowance allows businesses to claim 100 per cent capital allowances on the first £100,000 of investment on plant and machinery (excluding cars). Expenditure over the £100,000 limit will be dealt with under the main or special rate pools (see below). The Annual Investment Allowance is open to all businesses, not just small and medium-sized businesses. It will be reduced to £25,000 from April 2012.
• The 'special rate' pool gives 10 per cent capital allowances on integral features of buildings, thermal insulation and long-life assets. The rate will reduce to 8 per cent from April 2012.
• The allowance for qualifying industrial buildings and hotels is 3 per cent.

8.3 To make life simple, all equipment subject to the main rate is generally lumped together in a 'pool', and capital allowances are calculated at 20 per cent of the total value. This will reduce to 18 per cent from April 2012.

8.4 Assets which have a useful life of four years or less are called 'short life assets' and may qualify for accelerated capital allowances on disposal, depending on the circumstances.

8.5 5 Since 1 April for corporation tax and 6 April 2009 for income tax, new expenditure on company cars has qualified for capital allowances. The rate will depend on the car's CO2 emmissions.

• Cars emitting more than 160 grams per kilometre are allocated to the 'special rate' pool.
• Cars emitting less than 160 grams per kilometre are allocated to the main rate pool.
• Low emission cars (less than 110 grams per kilometre) qualify for 100 per cent capital allowances.

8.6 You can choose to defer capital allowances. For example, if you make a trading loss and have no tax to pay, you can defer the tax benefit you would have had until a later year.

8.7 Repairs to machinery and equipment are fully tax-deductible. Only improvements to equipment count as capital expenditure.

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

8.9 Time your purchases so that you buy any equipment you need before your year end.

• If you make a purchase the day before your year end, you still receive the full capital allowance for the whole of that accounting period.