Navigating complex capital allowances regulations for optimal benefits
Photo by Tima Miroshnichenko
Want to cut your tax bill legally?
We all have one thing in common: We wish our taxes could go down.
The good news is that there is an entirely legal way to make that happen and most businesses are not doing it.
Meet your new best friend: Capital allowances.
However…
UK businesses claimed £155.3 billion in capital allowances for 2022-23 financial year alone. Despite billions of pounds of qualifying investments, many UK businesses are unknowingly leaving money on the table with significant gaps in awareness and under-claiming.
What you’ll learn:
- The best parts of capital allowances.
- The various types of capital allowances available for businesses to claim.
- Best practices and principles to follow through when managing complex capital allowances regulations.
- Frequent mistakes that lead to potential thousands of pounds loss.
- Maximise your claims for capital allowances and get the most out of the process.
The best parts of capital allowances
In simple terms, capital allowances are the money you put into your business that you get to deduct from your profits when you calculate how much tax you have to pay.
When you buy equipment, machinery, furnishings, or make improvements to commercial property, you don’t actually have to pay for all of it. The government lets you deduct (up to 100% of) that purchase price against your taxable profits.
It’s not a grey area tax-dodging trick. It’s a 100% government-approved way of saying, “thank you for investing in your business”.
What’s better?
You have complete control of when to claim those allowances. It means that you can even time your claims when you need them most, thereby maximising your tax savings.
Businesses who take their finance and tax strategy seriously have options that they can explore to really, truly get those pounds going back into their bank accounts and sixforward.com is always one of the top ones for those complex projects.
The various types of capital allowances available for businesses to claim
Not all capital allowances are made equal. The types available can range from the “simple and straightforward” to the “whaaaat” for tax reduction on your equipment purchases and other qualifying asset investments.
The Annual Investment Allowance (AIA)
The AIA is probably the first allowance that most people think of. You can claim 100% relief on qualifying capital expenditures of up to £1 million per year.
Let’s break it down:
Buy a £50,000 machine for your business.
Under the AIA, you can claim £50,000 against your taxable profits in the same year of purchase.
Simple, right?
Full expensing
This is the new kid on the block, and it’s extremely generous.
Companies can claim 100% of the cost of qualifying plant and machinery in the year of purchase with no upper limit.
The catch?
It’s only for companies paying corporation tax. It also has specific rules on what counts as qualifying plant and machinery.
Writing down allowances
If your assets can’t be claimed under the AIA or full expensing, you can usually still claim writing down allowances. It’s a little different, though:
- The main rate pool: 18% per year on a reducing balance.
- The special rate pool: 6% per year on a reducing balance.
First-year allowances
You can claim 100% of the cost in the first year for certain types of environmentally beneficial equipment and low-emission vehicles.
Best practices and principles to follow when managing complex capital allowances regulations
Things will get tricky when managing capital allowances regulations as they are not as simple and straightforward as the examples above.
Capital allowances regulations are complex.
It changes almost every year, and what qualifies under one scheme may not necessarily qualify for another.
However, here’s the deal…
Know your asset categories
Assets fall into various categories with their own set of rules.
- Plant and machinery: It includes all the usual equipment and machinery for your business but also fixtures such as electrical systems and air conditioning
- Integral features: Like heating systems, electrical power systems, and lifts
- Long-life assets: Equipment that has an expected lifespan of at least 25 years
Time is everything
A lot of businesses make the mistake of not understanding when to claim.
If you’re having a good year, then claiming as much as possible could seriously cut your tax bill.
If you’re making a loss, then it might be better to carry forward some of your claims to future profitable years.
Documentation is key
HMRC expects you to have accurate receipts and documentation for every claim.
If you get caught without the paperwork in an audit, you could be in trouble.
Frequent mistakes that lead to potential loss
So many companies make the same mistakes over and over when it comes to claiming their capital allowances. Below are the most significant ones:
Mistake #1: Not claiming
Biggest mistake of all? Simply not claiming capital allowances because they don’t even know about them.
Common with small businesses, unfortunately.
Mistake #2: Under-claiming
Lots of companies only claim the big ticket items such as machinery and vehicles but miss out on fixtures and fittings that can also qualify for significant allowances.
Mistake #3: Poor timing
Claiming allowances without considering your overall tax strategy and timing is like throwing money away.
Mistake #4: Doing it all yourself
Capital allowances are complex and rules change all the time.
A small error in calculation or eligibility can cost you thousands in lost relief or penalties.
Maximise your claims for capital allowances to get the most out of it
If you want to milk those capital allowances for every penny, here are some tips:
Plan your purchases
Timing major equipment purchases right can make a big difference to your tax savings.
Review past purchases
You can make retrospective claims for capital allowances on past property purchases going back several years. This can unlock big refunds.
Get professional help
The rules are complex and change frequently, and getting professional advice is often worth the cost.
Stay up-to-date with rules
Capital allowances rules change all the time. Make sure you are aware of new allowances and rate changes that can benefit your business.
Keep meticulous records
Detailed records of all purchases including invoices, contracts and evidence of business use can make claiming allowances much easier, and it will come in handy if HMRC starts asking questions.
Get started with capital allowances today
Ready to get started with capital allowances? It is not hard, especially if you get the right professional support.
Here’s how to get started:
Step 1: Review recent capital expenditures and identify qualifying purchases
Step 2: Gather all supporting documentation and receipts
Step 3: Calculate potential claim using current rates and rules
Step 4: Consider enlisting professional help for complex claims
Step 5: Submit claim via tax return or amended tax return
Final thoughts on success
Capital allowances are one of the most valuable tax reliefs available to UK businesses.
They are also one of the most underutilised.
Like most good things in life, they are not always simple or straightforward.
But with knowledge, planning and attention to detail, capital allowances can transform your business tax strategy and provide a real cash injection.
Don’t leave any money on the table.
Capital allowances can be the difference between a good year and a great one.