Relief on Capital Expenditure

When a business purchase an asset (e.g. furniture, equipment, machinery, motor vehicles), the purchase will be analysed as capital expenditure. In the accounts depreciation may be included as an expense, which in turn reduces the value of the asset in the balance sheet. However, depreciation must be added back to profits on the tax return, capital allowances are then used instead, which are basically HMRC approved rates of depreciation. 

- Annual Investment Allowance (AIA): This would usually be claimed on plant and machinery, equipment, certain vehicles (not cars) and more. This allowance is 100%, so the full cost of the asset would be deducted from your profit for the year. Note that this allowance is available for up to £1 Million in assets for the year, once that is used the assets will be subject to WDA. 

- Writing Down Allowances (WDA): This is most commonly used for cars and for any other assets that don’t qualify for AIA, the allowance is either 18% or 6%, depending on the type of asset, for example a car with CO2 emissions over 50g/km would receive the 6% allowance. 

There are also full expensing and first year allowances (100% and 50%), these are allowed for certain new and unused assets in the year they are bought. Please note that only companies can use full expensing and the 50% first year allowances. 

When selling an asset after using capital allowances, there may be a balancing charge or balancing allowance, for example if you used AIA on the purchase of an asset, this reduces the assets tax value to £0, so if it was then sold for £1,000, this leads to a balancing charge of £1,000, which would be added back to your profit. It could also go the other way, for example if you used 6% writing down allowances on a car and the written down value of the car is £5,000, but you sell the car for £2,000, you would receive a balancing allowance of £3,000, which would be deducted from your profit for the year. 

For more information about Capital Allowances, call the team at Holmes and Company on 01525 851101 or contact us here