Capital allowances offer a valuable way to reduce your taxable profit when you purchase business assets. Essentially, they allow businesses to deduct a portion of the asset’s cost from their taxable profits, reducing the overall tax burden.
This blog will explain the types of capital allowances available, the process of claiming them and some tips to maximise your claims.
Understanding capital allowances
Capital allowances are available on most assets used for business purposes, such as machinery, equipment, vehicles and some types of buildings. By claiming capital allowances, you can write off the cost of these assets against your taxable profits. This is beneficial because it reduces the tax you must pay.
Types of capital allowances
There are several types of capital allowances that businesses can claim.
Here are the main ones.
Annual investment allowance (AIA)
The AIA allows businesses to claim 100% of the cost of qualifying plant and machinery up to a certain limit in the year of purchase. As of 2024, the AIA limit is £1m, meaning you can deduct up to £1m of the cost of these assets from your taxable profits. This is particularly useful for businesses making significant investments in equipment and machinery.
First-year allowance (FYA)
FYAs are available for certain energy-efficient and environmentally beneficial equipment. These allowances also allow you to claim 100% of the cost in the year of purchase. It’s a great incentive for businesses to invest in sustainable technology and reduce their environmental footprint.
Writing down allowance (WDA)
For assets that do not qualify for AIA or FYA, businesses can claim WDAs. This allowance lets you deduct a percentage of the asset’s cost from your annual taxable profits. The standard WDA rate is 18% for most plants and machinery, while a special rate of 6% applies to certain long-life assets and integral features of buildings.
The process of claiming capital allowances
Identify qualifying assets
The first step in claiming capital allowances is to identify which assets qualify. Generally, these are tangible assets used in the business, such as machinery, vehicles and equipment. Ensure you keep detailed records of all purchases, including invoices and receipts.
Calculate the allowance
Once you’ve identified the qualifying assets, calculate the amount of capital allowance you can claim. For AIA and FYA, this is straightforward since you can claim 100% of the cost. For WDAs, you’ll need to apply the appropriate percentage to the asset’s cost.
Include in your tax return
Claiming capital allowances is done through your company’s tax return. This means including the allowances in your corporation tax return for most businesses. Ensure you have all the necessary documentation to support your claim, as HMRC may request evidence of your purchases and calculations.
Keep accurate records
Maintaining accurate and detailed records is crucial. Not only does it make the process of claiming capital allowances smoother, but it also ensures you have the necessary documentation if HMRC questions your claims. Keep copies of all invoices, receipts and any other relevant documents.
Maximising your capital allowances claim
To make the most of capital allowances, consider the following tips.
Plan your purchases
Timing your asset purchases can significantly impact your capital allowances claim. For instance, purchasing assets just before the end of your accounting period can bring forward tax relief, reducing your taxable profits for that year.
Take advantage of AIA
Maximise the use of AIA by planning your asset purchases to stay within the £1m limit. If your investments exceed this amount, consider spreading purchases over multiple years to utilise the AIA fully.
Consider energy-efficient investments
Investing in energy-efficient and environmentally beneficial equipment helps the environment and allows you to claim FYAs. Check the list of qualifying assets on the government’s website to ensure your investments qualify.
Review your claims regularly
Regularly reviewing your capital allowances claims can help identify missed opportunities or errors. This ensures you are maximising your tax relief and complying with HMRC requirements.
Why FMA?
At FMA, we understand the importance of maximising your capital allowances to reduce your tax burden and improve your business’s financial health. Our team of experienced accountants can help you manage capital allowances with ease, ensuring you make the most of the available reliefs.
We provide tailored advice and support, helping you identify qualifying assets, calculate your allowances and maintain accurate records.
Contact us today to learn more about how we can support your business.
