Updated: Mar 30, 2022
What are Capital Allowances
Who can claim?
Capital Allowances - What are they and who can claim them?
Far too many business owners don’t understand how to claim capital allowances, or even what they are. If you ask, you’re likely to get jargon-filled answers about tax relief, business assets, and before-tax profits. We’re going to break it down and give a simpler explanation, including all the background information you need to know in order to understand capital allowances.
The government charges tax not only to individuals but also to businesses in order to raise the money that pays for roads, schools, and other public services. If you’re at work, you’ll be paying a variety of different taxes. These could include council tax and national insurance. If you earn above a certain threshold, you’ll also be paying income tax.
Just like people, businesses also pay taxes to the government. Corporation Tax is similar to income tax; you pay a proportion of the amount of money you gain to the government, so the more money you or your business make, the more money the government will take in tax. At the time of writing (March 2021), the rate of Corporation Tax is 19% of a business's total profits.
Since we know that Corporation Tax is defined as a percentage of profits, a smaller profit will mean paying less tax, and if you make a loss then you won’t pay any Corporation Tax at all. Of course, nobody wants their business to make a loss or to make a small profit, but equally, many business owners don’t want to pay more in tax than they absolutely have to. That’s where tax deductions come into it.
Tax deductions allow a business to subtract certain costs from their profits. This means that they can declare a smaller profit to HMRC and pay less Corporation Tax.
Capital Allowances are a kind of tax deduction. They’re designed to reward businesses who “spend money to make money” because money needs to keep flowing between people in order to maintain a strong economy. The Treasury is particularly keen for you to spend money on machinery, equipment, buildings, renovations, and some vehicles. If you ran a publishing company and you needed to buy a new printing press in order to create more books to sell, the Government will reward you for buying that machine. Once you’ve calculated your profits for that year, the government will let you subtract the cost of the machines, so you can pay less tax.
Here’s an example:
I own a factory manufacturing T-shirts. One of the machines I use to dye the T-shirts breaks, and I have to replace it in order to keep meeting orders. The cost of the new machine is £50,000.
At the end of the tax year, my accountant adds up all the money I have been paid and declares that I’ve made £1 million in profit. The government will take £190,000 in tax, so I’ll be left with £810,000.
However, I’ve realised that the new machine I purchased allows me to claim capital allowances. Instead of declaring £1 million in profit, I declare £950,000. This means that I only pay £180,500 in Corporation Tax. I’ve saved my business £9,500.
Who Can Claim?
You’ve probably realised by now, capital allowances can be claimed by anyone paying UK taxes. There are tax deductions available to freelancers and lone traders, but they’re assessed differently. More information on the types of businesses that are eligible can be found here [https://www.dedicatedcapitalallowances.com/do-i-qualify].
There are complicated rules around which expenses could qualify for capital allowances. We can’t go into the full detail here, but to give a broad overview qualifying expenses include:
Purchasing a new building
Renovating a building
Extending a building
Purchasing heavy machinery
Purchasing important equipment
Purchasing some vehicles, such as vans or lorries, that will only be used by the business and not for any personal use.
We could talk for hours about capital allowances and the fantastic benefits they offer business owners, but we’ll save that for another blog!
Hopefully, this broad overview has answered some of your initial questions - if you’ve got more then drop us an email at firstname.lastname@example.org and let us know what we should write about next!