Capital allowances are tax reliefs on the annual taxable incomes of taxpayers on qualifying capital expenditures. It is available when a taxpayer or a company spends money to buy or build any fixed asset for business use only. HMRC gives this type of relief only to encourage investors to invest more.
Keep in mind that a Capital allowance allows you for tax relief, not a tax deduction, which means there will be a reduction in your taxable income amount overall which will ultimately reduce your tax payable, whereas a tax deduction only deducts a certain amount of tax payable.
Who can claim a capital allowance?
Any taxpayer who pays income or corporation tax and purchases fixed assets for business purposes can claim capital allowance on their taxable income.
Types of capital allowances:
First-year allowance (FYA)
The first-year allowance gives 100% relief on the price of assets that qualifies as green technology assets. This allowance is only available for green energy-efficient technology, and that is how the UK government encourages investors to buy eco-friendly technology and save the environment.
Annual investment allowance (AIA)
This is the biggest allowance of £1,000,000 given every year to be deducted from the cost of any new fixed asset purchased. If companies want to buy two assets separately costing more than £1,000,000, they can purchase each in different years and can waive off the whole amount.
To qualify for the annual investment allowance, assets must fall in the category of “plant and machinery”. For Example, agricultural machines or vehicles like tractors or harvesters, heavy-duty vehicles, office machinery such as computers, and other heavy-duty vehicles, etc.
Assets that do not qualify for AIA are those that are previously being used for any other purpose. For example, personal use, or those expenditures which have occurred during the period when trading was ceased by the business.
Writing down allowance
Assets that do not qualify for any allowance (FYA or AIA) especially carbon-emitting vehicles, along with other non-qualifying fixed assets grouped in collective pools where they got reliefs of 6% or 18% according to their carbon emissions. If the cost of assets qualified for AIA is greater than £1,000,000, the remaining amount can be added to the WDA pool and get relief of 6% or 18%.
Types of pools:
• Special rate pool (6%), this is for long-lasting assets like thermal insulation or solar shading, etc.
• Main pool (18%), this is usually for assets with a short life.
• Single asset pool depending on the item. (6% or 18%)
