Capital allowance - What is capital allowance?
Capital allowance is an amount of money spent on business assets that can be subtracted from what a business owes in tax
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In the UK, a business can claim capital allowance based on the assets that are bought over the course of the tax period that are kept for use in the business.
However, capital allowance does not apply to all types of assets. There are specific categories that the assets must fall under in order to qualify and be claimed under capital allowance with HMRC.
Why claim capital allowance
Claiming capital allowance means a reduction in tax, something that is nearly always a positive for a business (and individual). Essentially, a percentage of the amount that the company has spent on assets is deducted from the tax rate when taxes are filed.
A reduction in tax amounts can be a big break for a business, especially one just starting out as it means you retain more cash that can be reinvested to foster company growth.
What can be claimed under capital allowance
Not every asset purchased is eligible to be claimed for capital allowance. Typically, assets that cannot be included in capital allowance claims include: buildings & land, gifts and any asset that was bought before the launch of the business (even if it is being used currently for the business).
Assets that are more commonly claimed under capital allowance include:
- Equipment, such as hardware or other devices that are necessary for the running of the business
- Machinery, such as dishwashers, refrigerators, plant machinery, etc.
- Vehicles, if used for the purpose of running the business
In addition, capital allowances can be claimed for renovations (as long as they pertain to the business property), costs pertaining to research & development, as well as patents and intellectual property.
Note that the assets must be owned by the business, not under lease.
How to claim capital allowance
When filing your self-assessment, businesses have the opportunity to mark claims for amounts spent on assets in the relevant time period.
Annual investment allowance (AIA)
Most assets that are eligible can be claimed for their full cost to be deducted under AIA.
First year allowances
First year allowances give new businesses a chance to offset their costs that can quickly add up within the first year. This is aimed at small to medium sized businesses to give them a break from the costs that can arise in launching a new business.
Capital allowance and accounting software
Keeping track of your expenses and assets when starting a business is a pillar of ensuring long term success and getting the most out of your capital allowances when it comes time to file tax.
This is made easier with an invoicing & accounting software that makes it easy to record and track your expenses. In Debitoor, you can mark expenses as an asset and track their depreciation within your account. Financial reports also make it simple to grasp which assets are eligible for capital allowance.