Maximising Tax Savings with Capital Allowances
For businesses, capital expenditure is an integral part of growth and expansion. What many business owners may not realise is that they can leverage capital allowances to gain significant tax advantages. Whether you’re a sole trader, limited company or a corporation, understanding these concepts will help you make informed decisions and maximise your tax relief.
Claiming Capital Allowances
In the United Kingdom, there are provisions for claiming capital allowances or tax deductions for expenses related to working from home, including for part-time work or the ‘new norm’ hybrid working.
However, it’s important to note that capital allowances typically relate to the cost of tangible assets used in the business such as structures or buildings including garden offices, business cars, lorries or vans, or equipment, plant and machinery.
For expenses specifically relating to working from home or hybrid working, such as home office expenses, there are often different rules and provisions. Instead of capital allowances, you may be eligible to claim certain tax deductions or allowances for these expenses. These could include deductions for a portion of your rent or mortgage interest, utility bills, internet fees, and office supplies.
Hybrid Rate Capital Allowance Considerations
If you work both in an office and at home, you may still be eligible to claim certain tax deductions or allowances for the expenses related to your home office. To claim deductions for your home office expenses, you typically need to demonstrate that you use a specific area of your home regularly for work purposes.
HMRC’s Capital Gains Tax Manual makes it clear that where a substantial part of the home is used exclusively as an office, private residence relief should be restricted for Capital Gains Tax purposes. HMRC’s manual also makes it clear that a room that is used partly for business purposes and partly for private use will qualify in full for the principal private residence relief.
It’s advisable to consult with a tax professional to understand the specific requirements and limitations for claiming home office deductions when working both in an office and at home.
Capital Allowances Classifications
Annual Investment Allowance (AIA)
The Annual Investment Allowance (AIA) provides businesses with an excellent opportunity to claim substantial tax relief on qualifying capital expenditure. As of April 2019, the AIA limit was set at £1 million and is the same today. This means that businesses can claim immediate tax relief on up to £1 million of qualifying expenditure.
Claimable Items – AIA can be claimed on a variety of assets used for business purposes, including:
- Office Equipment – This includes computer hardware, specific software, and office furniture that are essential for your business operations.
- Integral Features – Parts of a building that are considered integral features, such as air conditioning systems, fitted kitchens, or bathroom fittings, are eligible for capital allowances.
- Fixtures – Certain fixtures within a building, like air conditioning units, fitted kitchens, or bathroom fixtures, can also be claimed for capital allowances.
- Commercial Vehicles – Lorries or vans used for moving purposes, such as transporting goods or equipment, can be included in your capital allowances claim.
- Machinery – Business-related machinery, such as industrial machines or equipment used for manufacturing or production processes, qualifies for capital allowances.
- Agricultural Machinery – Agricultural assets, including tractors and other machinery used in farming activities, can be claimed for capital allowances.
- Entertainment Machines – Machines used for providing entertainment, such as arcade game machines, can also be included in your capital allowances claim if they are used for business purposes.
Non-Claimable Items – You cannot claim AIA including:
- Business Cars – AIA cannot be claimed on cars that are used for business purposes. Different rules and allowances apply to business cars, and they are not eligible for the AIA.
- Pre-owned items – If you owned certain assets for another purpose before you started using them in your business, you cannot claim AIA on those items. The AIA is specifically applicable to qualifying expenditure incurred for business use.
- Gifted items – Similarly, if you receive items as gifts or they are given to your business without any expenditure incurred, AIA cannot be claimed on those items. The AIA is intended for deductions on qualifying expenditure that you actually incur.
It’s important to be aware of these exclusions when determining your eligible capital expenditure for AIA claims. Always consult with tax professionals or refer to the latest tax regulations to ensure accurate allocation and compliance with the rules.
100% First Year Allowances
Eligible businesses, including sole traders, can deduct 100% of their expenditure in the first year. If you buy an asset that qualifies for 100% first year allowances, you can deduct the full cost from your profits before tax. This is in addition to annual investment allowance (AIA), as long as you do not claim both for the same expenditure.
To take advantage of the ‘enhanced capital allowances’ (a form of 100% first-year allowance), you can claim them for specific equipment that meets the following criteria of being new and unused:
- Electric Cars and Zero CO2 Emission Cars
- Plant and Machinery for Gas Refuelling Stations
- Gas, Biogas, and Hydrogen Refuelling Equipment
- Zero-Emission Goods Vehicles
- Electric Vehicle Charging Point Equipment
- Plant and Machinery for Freeport Tax Site Use
By claiming these enhanced capital allowances, businesses can benefit from immediate tax relief on qualifying expenditure incurred on the aforementioned equipment. Remember to consult tax professionals or refer to the latest tax regulations for accurate classification and compliance with the rules and requirements of enhanced capital allowances.
Super Deduction And 50% Special Rate First Year Allowance
The super deduction is a valuable incentive that allows companies to claim a significant deduction on certain qualifying plant and machinery costs. It enables businesses to deduct 130% of the eligible expenditure from their taxable profits, providing an enhanced tax relief opportunity. To claim the super-deduction, the plant and machinery must be newly purchased and unused. It applies to qualifying assets acquired between 1 April 2021 and 31 March 2023.
The 50% special rate first year allowance, also known as the SR allowance, allows companies to claim a 50% deduction on qualifying plant and machinery costs. Similar to the super-deduction, the SR allowance is applicable to new and unused assets acquired between 1 April 2021 and 31 March 2023.
It’s important to note that these temporary first-year allowances are only available for companies. Sole traders and other business structures may not be eligible to claim these specific allowances.
Capital Allowances On Business Cars With Co2 Emissions
Capital allowances can be claimed for cars that are purchased and used in your business operations. This provides you with the opportunity to deduct a portion of the car’s value from your profits before calculating your tax liability. By claiming these capital allowances, you can reduce your taxable income, resulting in potential tax savings for your business.
It is important to consider the specific rules and regulations regarding capital allowances for cars, as they may vary based on factors such as the car’s CO2 emissions and the date of purchase. Consulting with tax professionals or referring to the latest tax guidelines will ensure accurate and compliant utilisation of capital allowances for business cars.
Please note buying a car in the business name but using it for personal use, may trigger a benefit in kind tax liability.
Passman Leonard Are Experts In Capital Allowances
Navigating the intricacies of hybrid rate capital allowances requires a comprehensive understanding of the tax rules and regulations. As it is such a complex area, to ensure accurate allocation and classification of assets, it is crucial to determine the qualifying expenditure for each item.
Seeking advice from the tax professionals here at Passman Leonard is recommended to maximise tax relief and maintain compliance. Our experienced team can help assess your capital expenditure, identify assets eligible for hybrid rate capital allowances, and guide you through the intricacies of the tax regulations.
With our expertise, you can confidently navigate this complex area and optimise your tax savings while ensuring compliance with the latest tax laws. Let us assist you in maximising your tax relief and securing the financial success of your business.
Looking for advice on hybrid rate capital allowances? Get in touch today via email info@passmanleonard.co.uk or call on 01895 434515.
