46 | OCTOBER 2019
Business
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AN INTRODUCTION TO
CAPITAL ALLOWANCES
Small Businesses Encouraged to Make Use of Tax Breaks on Asset Investment
Ensuring that your small
business is as successful as pos-
sible means exploring all the tax
relief options open to it to max-
imise profitability, but confusion
and lack of knowledge around the
subject of capital allowances dis-
courages many a business owner
from utilising this valuable method
of tax efficiency. Tax preparation
specialist David Redfern, direc-
tor of DSR Tax Claims Ltd has
provided his guidance for small
businesses, partnerships and sole
traders who wish to employ this
avenue of tax relief.
Capital allowances are a method
by which businesses can treat
their business assets in order to
maximise the tax efficiencies of
their business. Business assets
refer to larger or more expensive
items of business expenditure,
such as computer equipment,
plant and machinery and business
vehicles. Redfern stated: “In order
to be eligible for capital allowanc-
es, such assets have to be solely
for business use - personal and
non-business usage isn’t permit-
ted under HMRC regulations. In
addition to physical assets such
as machinery, non-physical assets
such as patents and intellectual
property can also be subject to
capital allowances as assets of
your business as can renovations
and improvements to business
property, although routine main-
tenance is not allowable.” In order
to be able to claim capital allow-
ances, a business or sole trader or
partnership must be using tradi-
tional accounting methods. Sole
traders and partnerships which
use cash-basis accounting cannot
utilise capital allowances although
they can deduct such business
purchases as a business expense.
The Annual Investment Allow-
ance (AIA) allows businesses to
deduct the entire value of a busi-
ness asset from profits before tax.
In the October 2018 budget, AIA
was temporarily increased for two
years to £1m per year from 1st
January 2019. This increase, from
the previous limit of £200,000 is
intended to stimulate business
investment. Redfern explained:
“Businesses can claim AIA on
most plant and machinery pur-
chases with the exception of cars,
which would be subject to writing
down allowances instead. Items
which were previously owned
personally before being given to
the business are also not eligible
for AIA”. AIA can only be claimed
in the accounting period in which
the asset was purchases and busi-
nesses receive a new allowance
for each accounting period. AIA
may not be claimed in a business’s
final accounting period in order to
prevent abuse of the allowance.
For assets which are not eligible
for AIA, there are other allowances
such as first year allowances and
writing down allowances which
can also allow a business to offset
some or all of its business asset
expenditure against profits before
tax. First year allowances are ap-
plicable to certain energy efficient
equipment such as water saving
equipment or zero emission goods
vehicles, as long as they are new.
Certain company cars with low
CO2 emissions are also eligible
for this allowance. These assets do
not count towards the AIA limit
and the allowance can be claimed
alongside AIA. Redfern stated “For
those assets which aren’t eligible
for either AIA or first year allow-
ances, you might be able to claim
writing down allowances where
you deduct a percentage of its
value rather than the full value.
You can also claim writing down
allowances on amounts over the
AIA limit.”
Limited companies will claim
capital allowances through their
Company Tax Return, while
sole traders and partnerships
which use traditional accounting
methods can claim this through
their Self Assessment Tax returns.
Partnerships must be standard
partnerships, not partnerships
where one partner is a limited
company.
For more information on
claiming allowable expenses and
how DSR Tax Claims can help
you claim, please click https://
dsrtaxclaims.co.uk/
About DSR Tax
Claims Ltd
DSR Tax Claims Ltd (company
registration 11459292) are a firm
of tax rebate specialists serving cli-
ents nationwide. DSR Tax Claims
are tax preparation experts who
specialise in identifying potential
allowable expenses for tax rebates
for clients. Their specialist team
can help employed and self-em-
ployed subcontractors with all
relevant paperwork to ensure their
claim is handled in an accurate
and efficient manner.