Generally speaking, the business expenses you incur are allowable against your profits. When it comes to fixed asset purchases, however (things like machinery, equipment or vehicles), these purchases are treated slightly differently.
To reduce your tax bill when purchasing fixed assets, it’s important to understand the capital allowances tax benefits available and how you can leverage them to enhance your tax planning.
What are Capital Allowances?
Fixed assets are classed as items of equipment that will be used in the business for more than a year – so, things like office furniture, machinery and company vehicles. For accounting purposes, the cost of these fixed assets is spread over the expected life by calculating a depreciation charge each year – in other words, the value the item will lose over this time:
- For tax purposes, the depreciation is added back (disallowed) and ‘writing down allowances’ are claimed instead.
- There is an Annual Investment Allowance (AIA), fixed at £1 million per annum for the foreseeable future. Most asset purchases up to that total can be claimed in full in the year of purchase. The main exceptions are cars and items you owned for another reason before putting them into the business.
- For some assets, 100% First Year Allowances (FYA) are available. These include:
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- new and unused vehicles with Nil CO2 emissions;
- new electric vehicle charging points;
- plant and machinery for use in a Freeport.
- For everything else you might purchase as a fixed asset, the costs are allocated into various pools depending on the type of asset, and Writing Down Allowances (WDA) calculated on the pool value on a reducing balance basis. These include:
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- Special Rate Pool 6% rate – Cars (new or used) with CO2 emissions > 50 g/km, integral fittings incorporated into commercial buildings (lifts, electrical and water reticulation, air conditioning, heating equipment), long-life (>25 years when new) items over £100K annual spend. Long-life excludes structures and buildings.
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- Main Rate Pool 18% rate – everything else. Note as specifics this includes cars with CO2 emissions >0 <50 g/km.
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- Structures and Buildings Allowance (SBA) – the SBA offers a 3% flat rate for 33.33 years on non-residential buildings, but not on land.
How we can help you
If you’re thinking of purchasing capital equipment, it’s worth knowing that the capital allowances tax benefits can often be claimed in a lump sum. This can positively impact both your tax charges and cash flow, even if the equipment is in use for several years.
As tax advisers, we can advise you on the tax treatment of different types of assets and, if external funding is required, our Business Advisers can help you prepare business plans and finance applications.
Contact our tax team on 0161 761 5231 or email theteam@horsfield-smith.co.uk.
