With COVID-19 having such a significant impact on businesses, it has never been more important to focus on your cash flow. As an alternative to borrowing money, one area that should be considered is claiming in full all the tax allowances and reliefs available to reduce payments or raising cash through tax repayments. Capital Allowances are a key area of this strategy.
What are Capital Allowances?
The cost of purchasing capital equipment in a business is not a tax-deductible expense. However, tax relief is available on certain capital expenditure in the form of capital allowances.
Plant and machinery allowances may be available on items such as machines, equipment, furniture, certain fixtures in a building (‘integral features’), computers, cars, vans and similar equipment used in a business.
There are special rules for cars and certain ‘environmentally friendly’ equipment.
Plant and machinery allowances may be available to owners of commercial property which is let out to a business.
The Annual Investment Allowance (AIA) gives a 100% write-off on most types of plant and machinery (but not cars) up to an annual limit of £1,000,000 from 1 January 2019 (but down to £200,000 from 1 January 2021). This applies to both sole traders and companies.
Writing down allowances (WDA) are given for expenditure for which AIA is not, or cannot be, claimed. Expenditure upon which AIA is not given/claimed will obtain relief through the main rate pool or the special rate pool rather than each item being dealt with separately.
The special rate pool is for parts of a building considered integral – known as ‘integral features’, items with a long life, thermal insulation of buildings and cars with CO2 emissions of more than 130g/km
The annual rate of WDA is 18% in the main rate pool and 6% in the special rate pool.
A 100% first year allowance (FYA) may be available on certain energy efficient plant and cars.
Why should I look at this now?
It is often the case that businesses have not previously had the time to fully focus on this issue, alternatively, other tax deductions may have been available that limited the need to carry out a thorough review. Therefore, the COVID-19 slowdown may be an ideal time to review the approach taken to capital allowances in the past and consider if there is scope to improve their existing position, reduce the income or corporation tax now due or to generate repayments.
Timing of a claim
Providing assets are still owned, after a review of prior years’ expenditure, an amendment of a tax computation and return can trigger the repayment of tax that has been paid in a previous accounting period. There is no time limit on the opportunity for claiming capital allowances for assets that are still owned and it is possible to bring any additional qualifying expenditure available into a tax year which is still open or available for amendment.
Which businesses could benefit?
Any businesses that have incurred capital expenditure on assets (particularly buildings or structures – including the acquisition, construction and refurbishment or fitting out of properties for occupation or investment) could benefit by carrying out a review.
Some specific areas to consider include:
- Have you purchased an existing property for which capital allowances have not been claimed or was a capital allowances election made on purchase for a limited or nominal amount?
- Are capital allowances claimed based on a historical or sample-based approach that may not reflect your recent profile of expenditure or take into account the latest legislation?
- Have you acquired another business where its historic capital allowances position has not been fully reviewed or considered?
- Have you incurred expenditure on energy saving or environmentally beneficial plant and machinery? For expenditure incurred up to April 2020, a 100% first year allowance is available or where a company has losses this can be surrendered for a payable tax credit.
SRC-Time are one of the South East’s leading accountancy firms in advising individuals and businesses in all aspects of their accounting and tax affairs and we are able to assist in any issue raised above.
Our expert team is available to provide you with advice and can be contacted on 01273 326 556 or you can drop us an email at firstname.lastname@example.org or speak with an account manager to get any process started.