Tips, advice and general accountancy-related news and views that relate to you and your business.

Capital Allowances

30 Aug 2016

HMRC (‘the taxman’) does not allow businesses to claim depreciation of their fixed assets as an expense

against taxable profits. Instead, they allow businesses to claim Capital Allowances. The principle is similar but Capital Allowances are computed according to strict HMRC rules whereas depreciation is more subjective.

You will usually see the effect of this on the tax computation, which will start with ‘Profit per the accounts’. The depreciation amount is then added back and the Capital Allowances deducted. This is one of several changes which may be made to the ‘accounting profit’ to adjust it to the ‘taxable profit’.

The good news is that the Capital Allowance rates can be generous. There are two rates: an Annual Investment Allowance (AIA) which is given in the year of purchase, and a Writing Down Allowance (WDA) for subsequent years.

At present there is a 100% AIA for capital expenditure of £100,000. So up to this amount you can claim the full amount of the cost in the first year. Expenditure is generally treated as arising on the day that the title to the asset passes – usually on the day of delivery. However, there are special rules if the date of payment is more than 4 months after the date the title passes. If buying via a hire-purchase agreement it is vital that the asset is actually brought into use.

WDA’s are given on the balance of the asset not yet written off. The Chancellor sets the rate but it is usually around 18% to 20% in 2012.

Where the life of an asset is expected to be less than 8 years it can be classed as a ‘short life asset’ which has a faster write off rate than WDA’s. This treatment is not available for cars and certain other assets.

Leasing is an alternative to purchasing assets outright. The full rental costs can be deducted against profits over the life of the lease. However, there is a 15% disallowance for cars where the CO2 emissions are above 160gm/km.

The above is general advice and individual treatments may vary. The information should not be relied upon without contacting one of our tax advisers.