What do accountants most commonly get asked about Capital Allowances?
For any accountant who works closely with businesses, conversations around Capital Allowances are likely to be a regular occurrence. Capital Allowances are a particularly complex area, especially as businesses usually have a number of assets to consider. As an experienced accounting professional, you’re likely to already be well-versed and knowledgeable on the topic, but being a broad and ever-changing subject it’s well worth brushing up on the basics.
With this in mind we’ve put together some of the most commonly asked questions accountants get asked about Capital Allowances to act as a quick guide to refer to.
Question: What are Capital Allowances?
Capital Allowances give businesses the chance to reduce their tax bill when spending money on items that benefit the company long term. This is known as capital expenditure.
Capital expenditure is generally made when a business:
- Purchases an asset for use in the business (referred to as a “capital asset”)
- Spends money on upgrading something in the business, such as a system or production line
- Pays to maintain a Capital Asset
Question: What is the difference between Capital Allowances and Capital Assets?
Unfortunately, there aren’t any set rules on this although according to HMRC it depends on certain circumstances. Just because something is considered a Capital Asset for one company, it doesn’t automatically follow that it will also be a Capital Asset for another. Having said that, for guidance a Capital Asset is generally something that:
- A business needs in order to function
For example, a hairdressing salon would need a sink for washing hair in so this would be a capital asset. But to contrast this, if it’s a car mechanic’s business, a hair washing sink wouldn’t count as a Capital Asset, even if they had one which they used for washing hands in.
- Will benefit the business long term
Again, ‘long term’ has no specific definition but as guidance an item would be classed as a Capital Asset if it has been used for more than 12 months.
- Is fairly expensive
There’s no particular HMRC threshold above which a typical business expense becomes a Capital Asset as it’s down to the size of the business. An item of equipment with a value of £200 could be an expensive Capital Asset if you’re a sole trader working from a home office. However, it’s small fry for a multi-million pound company that may not think twice about counting it as an everyday expense.
Question: What can I claim Capital Allowances on?
Machinery, plant and vehicles used in the business are the most common types of asset which businesses claim Capital Allowances on. For example, if the business is a freight company, plant and machinery may include items like forklift trucks for stacking pallets in the warehouse and the lorries that drivers use for delivering goods around the country.
Plant and machinery itself is a very broad umbrella in this scenario. Further to the above, it could also include features that are vital to a premises or other structure such as moving walkways, escalators and lifts, or it could be a building’s air conditioning or heating facilities. Additionally, hot and cold water systems, lighting, solar panels, electrics, kitchens, toilets, CCTV and even the fire alarm could all count as plant and machinery so it’s certainly a mixed bag.
Question: How are Capital Assets treated in my accounts?
As an asset is going to be used in a business longer term it must go on the business's balance sheet. However, each year some of the asset's value will drop as the asset is used, meaning that if a business tries to sell it, they won’t get the same amount they paid for it (it depreciates). To make an allowance for this loss of value, some of it has to be taken off the business's profit each year.
Question: Is depreciation an allowable expense for tax?
HMRC stipulates that depreciation is not an allowable expense in regards to tax, so it must be added back when you're working out the profit a business must pay tax on.
Question: Will a Capital Allowances claim affect my Capital Gains Tax position if I decide to sell my property?
Capital Allowances are not an especially well-understood element of the property conveyancing process, however they’re extremely relevant for anyone looking to invest in business and property. For accountants, it’s essential to make clients aware that if they make a profit from the sale of a property, then the Capital Gains calculation will not be affected by any Capital Allowances. For instance, if a property is purchased for £250,000 and sold for £350,000, then the resulting capital gain is £100,000. This amount isn’t affected by any Capital Allowances claims submitted for fixtures, nor will it be affected by how such allowances are handled at the point of sale. However, a tax planning opportunity does present itself if the property is sold at a loss, as it could be possible to limit that loss.
Question: What is the Annual Investment Allowance?
The Annual Investment Allowance (AIA) is open to all businesses large and small and means a company can write off the entire cost of qualifying plant and machinery (P&M), up to the permitted maximum amount, against taxable profits.
Since 1st January 2016, the AIA limit has been set at £200,000. However, the Budget of 2018 saw a temporary increase in the amount to £1 million for a specific time of two years from 1st January 2019 to 31st December 2020.
Question: Can tax be reduced via Research and Development?
The short answer is yes. R&D tax credits were launched in the year 2000 for Small and Medium Sized Enterprises (SMEs) and for larger companies in 2002. R&D credits are a Corporation Tax relief designed to encourage businesses to innovate and grow, in turn boosting the UK economy.
The rules surrounding what qualifies as R&D are complex. However, generally speaking a business project is likely to qualify as R&D if:
- The development is specific to the business.
- The development has the purpose of advancing technology or science.
- It’s a business that’s trading, rather than an individual who is working independently or as a vocation.
For more about R&D tax credits, what the process involves and how much a business can claim, there’s a wealth of information on the Myriad Associates R&D tax credits page.
Need further advice?
The team at Myriad Associates are experts in all areas of Capital Allowances, specialising in R&D tax reliefs and grants in particular. If you would like to clarify something or simply have a question, please feel free to contact us on 0207 118 6045 or use our contact page