Capital allowances permit businesses to write off the cost of capital assets, such as plant and machinery, against their taxable income. They take the place of commercial depreciation, which is not allowed for tax.
Annual Investment Allowance (AIA)
The first £500,000 of the year’s investment in plant and machinery, except for cars, is allowed at 100%. This new, temporary increase in the AIA from £250,000 per annum has effect until 31 December 2015. From 1 January 2016 AIA is reduced to a permanent level of £200,000 per year. This applies to any size of business, but there are provisions to prevent multiple claiming. Businesses are able to allocate their AIA in any way they wish; so it is quite acceptable for them to set their allowance against expenditure qualifying for a lower rate of allowances (such as long-life assets or integral features).
Tax effect of the AIA
Apart from reducing the amount of tax payable (by up to 45% for additional rate taxpayers), an AIA claim can protect the personal allowance of a business owner earning over £100,000 in that initial year of purchase.
The lowering of profits could have a dramatic effect on an individual’s entitlement to claim Tax Credits.
Writing Down Allowance (WDA)
Any additional expenditure over the AIA level enters either the 8% pool or the 18% pool, attracting WDA at the appropriate rate. The special rate 8% pool applies to long life assets, the addition of thermal insulation to existing commercial buildings, and integral features of buildings, specifically:
- Electrical systems (including lighting systems)
- Cold water systems
- Space or water heating systems, powered systems of ventilation, air cooling or purification and any floor or ceiling comprised in such systems
- Lifts, escalators and moving walkways
- External solar shading
- Active facades (climate-responsive features)
The main 18% pool applies to most other plant and equipment, including cars (see below).
Enhanced Capital Allowances (ECA)
In addition to AIA, 100% first year allowance is available on energy saving or environmentally beneficial equipment. Where companies (only) have losses arising from ECAs, they may choose how much they wish to carry forward and how much they wish to surrender for a cash payment (tax credit payable at 19%).
There is a separate ECA scheme for new electric and low CO2 emission (up to 75 g/km) cars and natural gas/ hydrogen refuelling equipment. They still qualify for 100% first year allowance, but do not qualify for the payable ECA regime.
There is a 100% capital allowance for the purchase of new, unused (not second-hand) vans, which cannot produce CO2 engine emissions under any circumstances when driven.
A maximum 100% initial allowance is available for qualifying business premises renovation. WDA of 25% (straight line basis) applies to expenditure on which initial allowance is not claimed.
Qualifying expenditure on cars with CO2 emissions more than 75 g/km and up to 130 g/km is allocated to the main pool and attract 18% WDA. Cars with CO2 emissions exceeding 130 g/km enter the special rate pool and attract WDA at only 8%.
Expenditure before April 2009 will continue to be subject to the old “expensive” car rules (with 18% WDA) for a transitional period of around five years.
Cars that have an element of non-business use will continue to be dealt with in single asset pools to enable the private use adjustment to be made.
Single asset pools
Apart from cars (mentioned above), single asset pools are required for short life assets (see below); and any asset with part private use by a sole trader or partner.
Some assets are projected to wear out quickly over a short period of time and pooling them would result in their value not being fully relieved when they are disposed of. So it is possible to make an election to have capital allowances on any such assets calculated in separate single asset pools. This leads to a balancing allowance or charge arising if the asset is disposed of within four years from the end of the accounting period in which it is acquired. If the asset is still held at the end of that period, the tax written down value is transferred into the main pool.
Write off of small pool values
Where a pool balance (main or special) is less than £1,000, it is possible to claim all or part of it as a WDA. This removes the need to carry forward small balances with ever-decreasing WDA claims. This measure does not apply to single asset pools.