As a UK-based business, you want to be able to minimize the amount of taxes paid so you can invest in other projects or hire more staff.
The tax rate for UK businesses can be anywhere from 20% to 40% of your profits. In other words, it’s to your advantage to show fewer profits on your tax returns.
How can you do that? There are many business expenses that you can write off which will lower your tax burden. One of them is for capital allowances.
What are capital allowances and how do you claim them on your taxes?
Keep reading and find out how you can use it to your advantage to save money on your taxes.
What Are Capital Allowances?
Capital allowances are a way to save on taxes when you purchase a capital asset for your business. A capital asset is something that you’ll use in your business for at least two years. This can be a piece of business equipment, computer, photography equipment, or intellectual property.
These capital assets are considered to be tangible, like in the case of a computer, or intangible, like intellectual property.
There’s not a cost threshold for a purchase to be considered a capital asset. You could buy a mobile phone for £150 and that could be a capital asset for a self-employed person.
On the other hand, a large company would see that purchase as a consumable purchase. They would see a large purchase like a large printing press to be a capital asset.
What do capital assets have to do with capital allowances? You can claim these expenses against the profit of your business since these purchases are above and beyond the day-to-day operating costs of the business.
What Can You Claim as Capital Allowances?
Now that you have a better understanding as to what capital allowances are, let’s take a look at what you can claim. Here are the main items to consider for claiming capital allowances.
Plants and Machinery
The main category for capital allowances is called plants and machinery. Cars, the costs of taking down plant and machinery, the “integral features and fixtures” of a building, and renovations that would allow you to install machinery.
Commercial property can be claimed as well. You can claim capital allowances for the purchase or property for business purposes. You can also claim capital allowances for the renovation of business property.
Integral features and fixtures are a largely unknown category but play an important role in reducing your taxes.
Integral features are considered to be walkways, air conditioning units, water systems, and electrical systems.
Fixtures include bathrooms, fitted kitchen, and fire alarm and security systems. You can even count door handles as fixtures. If you want to know more about these property allowances, read more now.
Do You Rent Residential Property? Your business could qualify as a holiday letting business under a couple of conditions. The first is that the property has to be available for rent for more than 210 days a year.
The second part is that you have to rent the property for more than 105 days a year to qualify.
Beyond Plant and Machinery
While most of the capital allowance expenditures revolve around property, other expenditures can be included, too.
For example, if your company had to perform research and development that can count. Oil and gas exploration could be included as a part of research and development.
Mineral extraction can be included, as can the costs to obtain patents and protect intellectual property.
Deducting Capital Allowances
There are a lot of things that you can claim as a capital allowance for your business. Now the question becomes how you can claim them.
You may be able to deduct the entire purchase at once or a percentage of the purchase for years to come. These are known as the First-Year Allowance and the AIA (Annual Investment Allowance).
Here’s how you can claim capital allowances on your taxes.
Taking the First Year Allowance
This is intended for small and medium businesses to offset the startup costs of their business. There is a lot of investment that has to happen to open the doors of a business. This allows them to maximize their profits when they need it the most.
The first year allowance lets you write off the entire cost of the purchase.
If you’re in a situation where an item is used for business and personal use, you can deduct the percentage of the item that’s used for business.
The Annual Income Allowance
There are more restrictions around the AIA that you need to understand. The first is that the amount of the AIA is £1 million between January 1, 2020, and December 31, 2020. That’s an increase from £200,000.
You cannot use the AIA to claim car expenses, business gifts, or items that you had before you started the business.
If you had a computer that you owned before you started the business, that cannot be claimed. One other item to know is if you sell the item that you use for a capital allowance, you may have to pay taxes on that sale.
Save Money on Taxes with Capital Allowances
What are capital allowances? Capital allowances are usually thought of to apply to big purchases and property, but there are many other things that qualify.
Property fixtures, intellectual property, business equipment, and research and development call all be used to claim capital allowances. Every business is unique, and you want to consult with an accountant before you file your taxes.
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