Did you know that as a business owner in the UK, you can claim capital allowances on specific items and investments?
However, there are some things that you cannot claim capital allowance on – which we will discuss in this blog post.
Keep reading to learn more about your tax breaks and what you can do to take advantage of them!
Capital Allowances
As a business owner, it is important to be aware of the different tax breaks and allowances that you are entitled to.
Capital allowances are one of the key ways that you can reduce your tax bill – and so it is worth understanding what they are and how they work.
Capital Allowance Claim
What Can I Claim?
Capital allowances can be claimed on a wide range of items and investments. The official name of such items is ‘plant and machinery‘. These will be mostly machinery, equipment or even vehicles. You can also claim for the following:
- Business Premise Renovations
- Research and Development projects
- Patents
- Dredging
Apart from these, if you are a partner or sole trader with an annual income of £150,000 or less, you can use the ‘cash basis’ system, but it does not include land, buildings and cars.
What Can I Not Claim?
There are some items that you cannot claim capital allowances on.
These include:
- Land and buildings
- Cars (unless they are used for business purposes)
- Financial expenses
- Wages and salaries
- Business rates
- Insurance premiums
When and How
You can claim capital allowances when you file your annual tax return. This must be done within 12 months of the end of your financial year.
To claim capital allowances, you will need to include a calculation with your tax return. This should show how much you are claiming and what the writing down value of the item is.
If you are using the cash basis method, you will need to keep records of any items that you want to claim for. This is so that you can show how much they have cost you.
How To Calculate An Item's Value?
When you are claiming capital allowances, you will need to work out the ‘writing down value‘ of the item. This is the cost of the item minus any depreciation.
Depreciation is a way of spreading the cost of an item over its lifetime. The amount of depreciation will depend on the type of item and how long it is expected to last.
You can calculate the writing down value of an item by using the following formula:
Original cost of item – Depreciation = Writing down value
For example, if you bought a piece of equipment for £100 and it was expected to last for five years, the depreciation would be £20 per year. This means that the writing down value of the equipment would be £80 after one year (£100 – £20).
Limit On How Much I Can Claim?
The amount that you can claim for capital allowances depends on the type of business that you have.
If you are a sole trader or partnership, the limit is £200,000 per year. If you are a limited company, the limit is £500,000 per year.
If you spend more than these limits on plant and machinery, you can carry forward the unused amount to future years. This means that you can claim it against your profits in those years.
Making The Most Of Capital Allowances
Capital allowances can be a great way to reduce your tax bill and make your business more efficient. By understanding what you can and cannot claim for, you can make the most of this tax relief.
If you are thinking of making any large purchases for your business, it is always worth checking to see if you can claim capital allowances on them. This can help you to save money on your tax bill and make your business more efficient.
To know more, get in touch with us today.
