Small Business Accountants – Capital Allowances Guide
‘Capital allowances’ is the term used to describe the deduction we are able to claim on your behalf for capital expenditure such as business equipment, in lieu of depreciation.
Annual Investment Allowance (AIA)
The maximum annual amount of the AIA is £200,000. This means up to £200,000 of the year’s investment in plant and machinery, except for cars, is allowed at 100%. The AIA applies to businesses of any size and most business structures, but there are provisions to prevent multiple claims. Businesses are able to allocate their AIA in any way they wish; so it is quite acceptable for them to set their allowance against expenditure qualifying for a lower rate of allowances (such as integral features) – see more on this below.
Enhanced Capital Allowances (ECAs)
In addition to the AIA, a 100% first year allowance is also available on new energy saving or environmentally friendly equipment. Where companies (only) have losses arising from ECAs, they may choose how much they wish to carry forward and how much they wish to surrender for a cash payment (tax credit is payable at 19% but subject to limits).
A separate ECA scheme is available for new electric and low carbon dioxide (CO2) emission cars (up to 75g/km until 31 March 2018 and up to 50g/km from 1 April 2018) and new zero emissions goods vehicles (up to 31 March 2021 (corporates) or 5 April 2021 (others)). They still qualify for the 100% first year allowance, but do not qualify for the payable ECA regime.
Writing Down Allowance (WDA)
Any expenditure not covered by the AIA (or ECAs) enters either the main rate pool or the special rate pool, attracting WDA at the appropriate rate – 18% and 8% respectively. The special rate 8% pool applies to higher emission cars, long-life assets and integral features of buildings, specifically:
• electrical systems (including lighting systems)
• hot and cold water systems
• space or water heating systems, powered systems of ventilation, air cooling or purification and any floor or ceiling comprised in such systems
• lifts, escalators and moving walkways
• external solar shading.
For most other plant and equipment, including some cars (see below), the main rate applies.
A WDA of up to £1,000 may be claimed by businesses, where the unrelieved expenditure in the main pool or the special rate pool is £1,000 or less.
The Enterprise Zones in assisted areas qualify for enhanced capital allowances. In these areas, 100% First Year Allowances will be available for expenditure incurred by trading companies on qualifying plant or machinery.
Currently for cars purchased with CO2 emissions exceeding 75g/km (50g/km from 1 April 2018), the main rate of 18% applies. However, cars with CO2 emissions above 130g/km (110g/km from 1 April 2018) will be restricted to the special rate of 8%. For non-corporates, cars with a non-business use element continue to be dealt with in single asset pools, so the correct private use adjustments can be made but the rate of WDA will be determined by the car’s CO2 emissions. Remember, cars do not qualify for the AIA.
When a building is purchased for business use, it may be possible to claim capital allowances on plant elements contained therein, eg. air conditioning, subject to certain conditions. A joint election may need to be made with the vendor. Please contact us for further details and advice prior to any purchase.
Research and Development (R&D) investment
Tax relief is available on R&D revenue expenditure incurred by companies at varying rates. The current rates of relief are as follows:
• for small and medium-sized companies paying corporation tax at 19%, the effective rate of tax relief is 43.7% (that is a tax deduction of 230% on the expenditure). For small and medium-sized companies not yet in profit, the relief can be converted into a tax credit payment effectively worth 33.35% of the expenditure
• an ‘above the line’ credit exists for large company R&D expenditure. This is known as the R&D Expenditure Credit (RDEC) scheme and the credit has increased from 11% to 12% for expenditure incurred on or after 1 January 2018. The credit is fully payable, net of tax, to companies with no corporation tax liability
• SMEs barred from claiming SME R&D tax credit by virtue of receiving some other form of state aid (usually a grant) for the same project may be able to claim under the large company RDEC scheme. An SME may also be entitled to the large company RDEC for certain work that has been subcontracted to it.