What are Capital Allowances?

Capital Allowances are much misunderstood and consequently often left unclaimed, especially by small businesses.

 What is a Capital Allowance?

The capital allowance is an allowance against tax payable for any assets you buy to enable you to run your business. For example, if you’ve bought a new machine to help your manufacturing process, you can claim a capital allowance based on the cost. You can also claim capital allowances against the following if your business qualifies:-

  • renovating business premises in disadvantaged areas of the UK
  • extracting minerals
  • research and development
  • intellectual property
  • patents
  • dredging
  • structure and buildings

You can only claim for items you have purchased for the business, leased items do not qualify,  equally purchases made solely for business entertainment, buildings and land do not qualify.

 Why Are Capital Allowances Important?

Think of it this way. You spend much of your time and income on running your business. To do that you need the proper tools, whether they be machinery, computers, or anything else that is essential to enable you to do business. Sadly, nothing lasts forever and capital allowances are there to help you defray the cost of replacing  those items.

For many smaller businesses, whether it’s growing your business or maintaining your current status, capital allowances can be the difference between being profitable or not. A wise business owner puts funds aside when possible to invest in new equipment and emerging technologies. With careful use of capital allowances, business owners can boost the amount of money they have available to reinvest in their business to drive growth and add value.

 Who Qualifies For A Capital Allowance?

It doesn’t matter if you are a Sole Trader, Partnership of Limited Company, if your purchases qualify then you can claim provided the amount is within the Annual Investment Allowance. The allowance has changed several times and is published by HMRC here. Additionally there are first year allowances which can be claimed for startups.

 How Do You Claim A Capital Allowance?

Capital allowance can be claimed via your normal tax return method

  • Self Assessment tax return if you’re a sole trader 
  • Partnership tax return if you’re a partner
  • Company Tax Return if you’re a limited company

You must claim in the accounting period when you bought the equipment, and this should be borne in mind when planning major purchases.It is important to find out whether your business is eligible for a capital allowance before you invest. The sooner you do this, the more time you have to get the claim done. Ensuring that you make the most of your allowances is not as simple as it may sound and it is wise to consult your Bookkeeper or Accountant to ensure you comply with the fine details.

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