If you want to efficiently handle your taxes, then it’s of huge importance to get your facts straight when it comes to taxes and how they need to be addressed. That’s when capital allowance comes into play.
Namely, they are able to help you claim credits that are going to decrease the tax bill. That’s practically the entire point of them, however, if you want to know when and how to utilize them, then you need to learn more about this topic.
But don’t worry. That’s exactly why this informative guide is here today. It’s going to provide you with all the right information that’ going to help you comprehend everything perfectly. So let’s dive into it together!
Let’s Introduce You To Capital Allowance
So how can it be defined? If you ask Six Forward – The Capital allowances specialists, they'll tell you that it is a kind of tax relief that a company can claim whenever it decides to invest its money in long-term assets. Also known as fixed assets, these represent assets that typically stay in use by the firm for more than one year.
By claiming capital allowances, you are practically deducting part or the entire asset's value from profits. Companies pay taxes on the profits, so lowering the amount of profit means that they won't need to spend as much on taxes.
There are several sorts of capital allowances, with various criteria. In some instances, when you claim them it means that as a business owner, you can write off all the expenses that are related to your asset purchase in one year, which makes a drastic dent in the tax bill.
On the other hand, in some cases, the wear and tear of a particular asset will experience value depreciation over a long period of time, and then you can offset a percentage of its value against the Corporation Tax Bill while you are still the owner of it.
Learning All About Different Types Of Capital Allowance
The rules of every capital allowance are governed by legislation, and this includes the Capital Allowances Act 2001 as well. The Act of Parliament which was updated relatively recently comes with different regimes (and various rules too) depending on the type of capital expenditure.
There are a couple of sorts of capital allowances, however, the most common one include the following:
- Plant or machinery (it's safe to say that this is a very broad term, due to the fact that these allowances are crucial for a plethora of companies)
- Particular commercial constructions and bigger buildings
- Research and development
One of the biggest challenges when it comes to this is to draw the line between the machinery and expenditure on plant, and the buildings. How come? Well, that’s because a massive part of the expense of any property will make up for machinery and plant.
It’s worth mentioning that no capital allowance can be created until the expenditure has been precisely split up between various categories. Furthermore, there are frequently grey areas, particularly in regard to the definition of plant and machinery, and a lot of cases have been argued in the tax tribunals and courts for many years.
How Much Are You Permitted To Claim?
Now, the answer to this question may be a bit confusing to some because it all depends on the capital allowances a particular item is qualifying for:
- Annual investment allowance – This enables you to deduct a complete expense of a qualifying item that’s forever capped at £1,000,000 per tax year. A lot of items can easily fall into this category. One of the exceptions as far as this is concerned, is an automobile, or any other item that you've purchased and utilized for any other purposes except for the ones that are related to your firm. For instance, you obtained a computer, but not for professional, but personal use.
- Jotting down allowances – This refers to the items that didn’t qualify for AIA. In these types of situations, you can claim a certain percentage of the value, which can be either six percent or eighteen percent, depending on the type of item you acquired.
- 100 percent first-year allowances – At times, you are still allowed to claim a full deduction for assets that cannot qualify for AIA. This represents part of the government's plans to stimulate companies to spend their cash in specific areas. For example, the latest zero-emission cars qualify for first-year allowances, instead of being put into the special rate pool with other autos which would be jotted down at six percent per year.
- Full expensing and fifty percent of special rate item – This one resembles AIA and it enables a business to deduct one hundred percent of the expense of a new, qualifying item. At first, this was perceived as a temporary measure, however, last year, it was converted into a permanent one. This brings a fifty percent first-year allowance for special rate pool items, which includes any vehicle that's not new and electric.
What Needs To Be Asked If You Decide To Purchase A Property?
If you’re planning on buying a commercial property, and, simultaneously claim capital allowances, then it’s pivotal to determine the status of the seller. What does it mean? It means that you need to establish if they’ve claimed before so that you are capable of doing so in the future.
During the due diligence stage of the purchase, you should take a look at the vendor's tax records, concerning the expenditure while they were the owners of the property. In some instances, during the purchase process, a vendor can still submit a tax allowance claim, and if they decide they want to negotiate the best price for the property, they will conclude how crucial cooperation is in these situations.
As a potential shopper of a commercial property, you have every right to demand a certain amount of money to be deducted from the original sale price as some sort of compensation for the upcoming tax losses.
There are numerous things and information that can be said when it comes to capital allowances. Today, we decided to focus on the most essential parts of it that will quickly show you how they work.
