With 5 April fast approaching, the pressure is on to make sure that you’ve used all capital allowances available to you in this tax year to reduce your tax bill.
For business owners, there are a number of tax reliefs you can use to make your capital expenditure as efficient as possible.
How do capital allowances work?
Capital allowances are a type of tax relief for businesses.
They allow you to deduct a certain amount of the cost of the item from your pre-tax profits, effectively reducing your taxable profits in any given financial year.
They act in a similar way to allowable business expenses if you were self-employed.
The aim of capital allowances is to make it easier for businesses to invest in capital that will help achieve growth by allowing them to effectively recoup some of the cost of the item.
When do I need to use my capital allowances?
As with many other tax reliefs, capital allowances apply to profits and purchases within each financial year.
This means that you need to use your allowances for 2023/24 by 5 April 2024, as this is the end of the financial year.
Going forward, you should plan a review before the start of April to ensure that you have used as much of your capital allowance as possible.
What capital allowances are available?
To encourage investment in capital, HM Revenue & Customs (HMRC) offer a number of allowances to businesses depending on the type of capital involved.
Many allowances cover ‘plant and machinery’ – capital which you use to run your business, including office equipment, workplace furnishings, industrial machinery and certain fixtures such as fitted kitchens.
The main plant and machinery allowances are as follows:
- Annual investment allowance (AIA) – You can deduct the full value of most plant and machinery (except cars) from pre-tax profits up to £1 million, which is your yearly allowance.
- Full Expensing – An allowance which offers 100 per cent first-year deduction from pre-tax profits on qualifying plant and machinery in one go, for limited companies.
- 100 per cent first year allowance – Similar to AIA, this allowance allows you to deduct the full cost of an asset in the first year from pre-tax profits.
- Enhanced allowances – Some new and unused capital can qualify for an enhanced rate, including electric cars, EV charging point equipment and certain sustainable fuelling equipment.
- Writing down allowances – You can deduct a percentage of the cost of certain capital which is not eligible for other allowances, divided into three pools with different rates depending on the type of asset.
However, these are not the only capital allowances available to you as a business owner. You may also be able to claim:
- R&D relief – Tax relief on commercial science and technology projects that seek an advancement in the field and overcome a challenge or uncertainty.
- Structures and buildings relief – You may be able to claim relief on the cost of purchasing, constructing or renovating a qualifying structure, such as an office or warehouse site.
- Patent Box – This allows businesses to apply for a lower 10 per cent rate of Corporation Tax for profits earned on its patented inventions.
How can I make the most of capital allowances?
Many allowances relate to activity carried out or assets purchased within that tax year, these are often limited by a specific annual threshold or criteria, so it’s important to plan your expenditure and activities to maximise these tax reliefs where possible.
For example, if you are currently considering investing in a piece of machinery but you have used your AIA for this tax year, you might consider one of two options:
- Using a different allowance, such as first-year expensing
- Putting off the expenditure until the new tax year
This will make sure that you don’t pay more tax than necessary and will therefore make investing in assets you need to run your business more financially viable.
It’s always best to seek advice on how to plan expenditure and activities around tax reliefs. We can assess your eligibility for certain allowances and make your business as tax efficient as possible.
To find out how we can do that for you, please contact our team.
