Using Super-sized Allowances for Capital Assets for minimising your Tax

Tax deductions cannot be claimed on the cost of capital assets. Instead, deductions are typically allowed for revenue costs, such as the expenses associated with running an office or factory, and the cost of goods and materials purchased for resale. However, there are numerous allowances for capital assets that can be utilized to decrease tax costs. These allowances encompass super-deductions, special rate first-year allowances, the100% first-year allowance, and the 100% annual investment allowance. If these deductions are not applicable, tax costs can be minimized using writing down allowances.

First year allowances

The100% first-year allowance permits the total cost of an asset to be deducted from profits if the asset qualifies. This allowance can be claimed in conjunction with the annual investment allowance:

• electric cars

• cars with zero CO2 emissions

• plant and machinery for gas refuelling stations

• gas, biogas and hydrogen refuelling equipment

• zero-emission goods vehicles

• equipment for electric vehicle charging points

• plant and machinery for use in a free port site.

Companies, partnerships, and sole proprietors can claim the 100% first-year allowance, with the exception of the allowance for free port plant and machinery, which can only be claimed by companies. This allowance is not claimable if the items are purchased for leasing to others or for use in a rented home.

Super-deductions and special rate first year allowances

Super-deductions and special rate first year allowances are claimable by companies on the cost of qualifying plant and machinery. These allowances apply to expenditure incurred from 1 April 2021 to 1 April 2023, provided the purchase was not due to a contract entered into before 3 March 2021. The final claim can be made for the period ending in April 2023.

The super-deduction permits a deduction of up to 130% of the cost from the business’s pre-tax profits. The special rate first year allowance rate is 50%. Special rate plant and machinery do not qualify for the super-deduction, but may be eligible for the 100% annual investment allowance.

Only specific plant and machinery qualify for these allowances or deductions. The plant and machinery must be new and unused. It must not be gifted to the business, a car (though other vehicles may qualify for the super-deduction), bought to lease to someone else (other than background plant in a building), or purchased in the accounting period that the business ceases.

The super-deduction can only be claimed for main rate plant and machinery, which is plant and machinery that is not special rate. Main rate plant and machinery include machines such as computers, printers, lathes and similar items, office equipment, vehicles other than cars, warehouse equipment, tools, construction equipment, and some fixtures and fittings such as fire alarm systems.

The special rate first year allowance can be claimed on special rate plant and machinery, which includes integral features, thermal insulation added to existing buildings, solar panels, and assets with a useful life of at least 25years. Integral features include items such as lifts, escalators, heating systems, air conditioning systems, hot and cold-water systems, electrical systems and external solar shading.

A super-deduction cannot be claimed for plant and machinery in ring-fenced trades, which are companies involved in the exploration and production of oil and gas.

HMRC provides further guidance on whether you can claim the super-deduction or the special rate first year allowance at GOV.UK.

Sole proprietors and partnerships

Sole proprietors and partnerships are ineligible for the super-deduction or the special rate first year allowance. However, they can avail the annual investment allowance, the 100% first year allowance, and writing down allowances.

Annual investment allowance

The annual investment allowance is set at £1 million. This allowance is accessible to sole proprietors, partnerships, and companies for plant and machinery. It is not applicable to business cars, items that were owned for other purposes before being used in the business, or items donated to the business. Instead, these items may be eligible for writing down allowances. Writing down allowances can also be claimed on amounts exceeding £1 million.

Claims for the 100% investment allowance and writing down allowances should be made on the business’s tax return.

Writing down allowances

The writing down allowance is applicable when the assets do not qualify for the annual investment allowance or when the £1 million allowance has been fully utilized. This allowance permits a deduction of a certain percentage of the asset value from the profits each year.

The permissible allowance amount varies based on the asset. The writing down allowances for business cars are dependent on the car’s emissions. For other assets, they are grouped into pools based on the rate they qualify for, and the claim amount must be calculated separately for each pool. There are three types of pools:

•The main pool with a rate of 18%.

•A special rate pool with a rate of 6%

•Single asset pools with rates of 18% or 6% depending on the asset.

All items are placed in the 18% pool unless they qualify for the special rate pool or the single asset pool. The 6% tax relief can be claimed on:

•components of a building deemed integral

•items with a long lifespan

•solar panels

•additional thermal insulation for a building

•cars with CO₂ emissions exceeding a certain limit.

Long-life items are those that have a useful lifespan of at least 25 years. If the value of these long-life assets surpasses £100,000, the cost of the assets is allocated to a special rate pool. However, if the value is £100,000 or less, the costs are assigned to the main pool. Items are placed into single asset pools if they are short-life assets or if they are used outside the business (in the case of a sole trader or partnership).

Disposal

Upon selling assets for which an allowance or deduction has been claimed, it may be necessary to pay tax on the sale proceeds. Generally, tax is due when the sale proceeds exceed the written down cost. For instance, if the original cost was £8,000 and a writing down allowance of £3,000 has been claimed, tax will be payable if the sale proceeds exceed £5,000 (£8,000 - £3,000 = £5,000).

Claims

HMRC provides a guide to help you determine what you can claim for capital allowances, which can be found on GOV.UK.

Conclusions

By claiming the appropriate allowances and deductions, you can significantly reduce your tax.While making a claim can sometimes be complex, most claims are straightforward and can be made through the tax return. If the business is unsure about what can be claimed, it is advisable to seek professional advice. Please get in touch with our team to get more information or assistance.