Within business taxation, capital allowances are often overlooked, under utilised and misunderstood. They are, however, a key tool in reducing your taxable profit and, consequently, your tax bill.

But what exactly are capital allowances, and how can they benefit your business? This guide aims to clarify what they are and how you can use them to reduce your tax bill, something every business owner should know.

What Are Capital Allowances?

Capital allowances are a form of tax relief available to businesses, offering a way to offset the cost of certain business assets against profits. Essentially, they allow you to write off the cost of tangible capital assets, such as equipment, machinery, or vehicles, against taxable income. The principle behind capital allowances is to give tax relief for the reduction in value of assets over time, acknowledging that assets used in a business lose value due to wear and tear.

The government provides plenty of reading on GOV.UK. 

Our website also provides answers to FAQs, as well as case studies for different types of commercial properties.

Types of Capital Allowances

There are several types of capital allowances, and understanding which ones apply to your business is crucial in maximising your tax savings.

• Annual Investment Allowance (AIA): AIA allows businesses to claim 100% tax relief in the year of purchase on most types of plant and machinery (excluding cars). There’s an annual limit, but within this limit, AIA can significantly reduce the tax bill in the year of investment.
• Writing Down Allowances (WDA): For expenditure not covered by AIA, or that exceeds the AIA limit, WDAs allow businesses to deduct a percentage of the asset’s value from their profits each year.
• First-Year Allowances (FYA): FYAs encourage businesses to invest in certain environmentally friendly and energy-efficient equipment by allowing them to deduct the full cost from their profits before tax.
• Structures and Buildings Allowance (SBA): SBA provides relief for investments in non-residential structures and buildings, allowing businesses to deduct a percentage of the construction or renovation costs against taxable profits over several years.

How to Claim Capital Allowances

Claiming capital allowances isn’t automatic and requires you to actively identify and claim them on your tax return. The process involves:

• Identifying Qualifying Expenditure: This is the first step, where you determine which purchases qualify.
• Calculating Allowances: Depending on the type of allowance, calculate the amount that can be claimed.
• Making the Claim: The claim is made through your tax return. Detailed records of the purchase and use of the asset should be kept as evidence.

You may be asking why your accountant hasn’t handled this or assume it’s already been addressed. We clarify this in our FAQ page, but in short, we collaborate with your accountant to ensure every claim is accurate and maximised.

Common Mistakes to Avoid

• Not Claiming on Time: There are strict deadlines for making claims. Missing these can result in lost tax relief.
• Overlooking Qualifying Assets: Many businesses fail to claim simply because they’re unaware that certain purchases qualify.
• Failing to Seek Expert Advice: The rules surrounding capital allowances can be complex. Professional advice can ensure that you’re not missing out on potential savings. That’s where we can help.

Conclusion

Capital allowances are a valuable tax relief mechanism that can significantly reduce your business’s tax liability. By understanding and effectively managing your claims, you can improve your business’s cash flow and invest further in its growth. However, given the complexity of tax legislation, consulting with a tax professional or capital allowances specialist is highly recommended to ensure you’re maximising your claims and remaining compliant with tax laws.

Remember, it is not just about saving on taxes; but about strategically reinvesting in your business’s future.

Unlock the Potential of Capital Allowances

As businesses strive to minimise tax liabilities and bolster profits, capital allowances emerge as a pivotal tool. Whether you’re a seasoned entrepreneur or just getting started, understanding the nuances can substantially impact your bottom line.

Thinking of optimising your tax strategy? Connect with us to learn how you can transform your financial roadmap.

Schedule a consultation with our tax specialists today: