Understanding Capital Allowances for Self Employed and Limited Companies
Capital allowances are benefits to a business to help reduce your tax bill when you buy assets for your business, while most assets can be considered from equipment and research costs to expenses for building renovations.
Buildings themselves purchased for business use do not qualify for the allowance, but there are some components which may qualify under 'integral features' such as lifts, water and heating systems.
Here we look at how capital allowances can work for your business and the rules on claiming this valuable benefit and how the rules differ for the self-employed and limited companies.
How capital allowances work in practice in a small business
For tax purposes we can group business assets purchased based on what allowances are available for them, and there are are two main categories: the main or general pool, which includes a mixture of different types of assets such as vans, machinery, computers, furniture etc and the second is the special rate pool, which includes integral features, long-life assets where more than £100,000 has been spent per annum and also high CO2 emission cards. Long life assets are those that have an expected useful life from the when the asset was first brought into use of more than 25 years. An aircraft is a good example of a long-life asset.The Annual Investment Allowance (AIA) is also available to businesses on assets purchased in the business and is a limit which allows expenditure of up to the amount to be claimed in full against profits. For both the general and special pool, the AIA is £200,000 per annum and it is beneficial to use the AIA against special rate pool items before the main pool items as these tend to be assets that are more costly and therefore you will be maximising the allowances available to you in a given tax year.As a business, you also have the Writing Down Allowance (WDA) available to you on assets purchased for business use. You can utilise WDAs if you have already claimed AIA on items worth more than the total AIA amount of £200,000 per annum. There are also some items that do not qualify for AIA, such as cars, gifs, or things that you owned before you starting using them in your business. The WDA is calculated by deducting a certain percentage of the value of an item from your profits in a given tax year. The WDA for general pool assets is 18% and the WDA for special pool assets is 8% per annum.For business cars the rate depends on their CO2 emissions.
Rules when a business asset is sold
When a business asset is sold, it is accounted for at lower of the original cost and sale proceeds to see whether any further allowance is available to you as a business. If there are too many allowances given to date on an asset being sold, if further allowances are still due, a claim can be made for the balancing allowance for the remainder of the period you retain the asset in your business.If a negative charge is calculated when looking at the balancing figure of capital allowances, the final allowance in the general or special pool is written down to nil. This is also true if the business ceases to trade, a final allowance will be given to write the pools down to nil.
Other examples where you can make a capital allowance claim
A small pool balance claim applies where the balance on the main and/or special pool is less than £1,000 and it allows the balance to be claimed in full, rather than considering the WDA percentages of 18% for the general pool and 8% for the special pool.Consideration for 'short life' assets is also given and this is any item (other than cars) with an expected life of 8 or fewer years. These short life assets actually sit in their own 'pool', but still qualify for AIA and WDA as per the general and special pools. The reason why these short life assets are in a pool of their own is because any balance of unclaimed allowances when a short life asset is sold or scrapped can be claimed in that year, whereas this is not allowed where a single item is sold from the general or special pool.Capital Allowances for Companies versus Self-Employed IndividualsTo demonstrate the differences experienced by a limited company with capital allowances versus a self-employed individual, here is an example of a limited company, Mighty Ltd, who has a tax written down value on it’s main pool of £87,800 to bring forward from the previous year and has provided details of the following capital allowances purchases for the year ended 31 March 2019:- In May 2018 there was a purchase of a freehold office building for £578,000. This total price included a ventilation system, a lift, and a cold water system. All of these items are integral features and totalled£342,000 of the price;- In June 2018 there was a purchase of machinery for £101,600. In order to site the machinery, the company had to pay £7,700 for alterations to the building;- In September 2018 a payment of £41,200 was made to local builders to construct a new decorative wall around the company car park;- In October 2018 there was a purchase of movable partition walls for £72,900. These are used to divide up the large office space and are moved regularly to allow for more or less desk space in each department;- In March 2019 there was a purchase of two cars costing £17,300 each. The first had CO2 emissions of 105g and is used as a pool car to make deliveries or collect parts as needed. The second had CO2 emissions of 180g and is used by the factory manager. He estimates that his private use of the car is 60%.You will note that there are a lot of purchases made during the tax year, some of which qualify for AIA (remember, it is only cars which donot) but some of these purchases are items which should appear in the special rate pool whilst others would appear in the main pool.Looking at each purchase in turn, understanding firstly if the purchase sits in the general, special or its own pool, and then working out the capital allowances due to help reduce the final profit figure and tax bill.For the purchase of a freehold office building for £578,000, buildings do not qualify for capital allowances but certainly the integral features which will always form part of any building do. In this case we have three particular items, all of which will be included in the capital allowances calculation. As integral features, these will appear in the special rate pool and they do qualify for AIA also.The purchase of machinery of £101,600 qualifies for capital allowances, plus any costs associated with getting that machinery to the right location and into a condition in which it can be used count as part of the cost. So here the £7,700 paid for building alterations will be added to the cost of the machine, and both will count as a capital allowance reduction. Machinery would appear as part of the main pool and therefore would also qualify for AIA so this is the start of the issue whereby we have qualifying AIA additions which would appear in each of our pools.In order to maximise the allowances available for the year, the AIA should be allocated first to any special rate pool additions and only any balance of the AIA available should be set against main pool additions.The payment of £41,200 to local builders to construct a new decorative wall around the company car park is an interesting one as the use of the word 'decorative' implies that the cost is not absolutely imperative for the running of the business. We can only claim capital allowances on items for the business that perform a function in the business so this item does not qualify.On the other hand, the purchase of movable partition walls for £72,900 would not generally consider to be plant and machinery but which are specifically mentioned in legislation as being qualifying assets for capital allowances purposes, and would form part ofthe main pool, and would therefore also qualify for AIA.The purchase of two cars costing £17,300 each is where we see a divergence of self employed and limited company rules for capital allowances. The fundamental difference for companies is that there are never any private use assets allowed for when making capital allowances claims and furthermore the treatment of cars is solely based on their CO2 emissions. In this case, the first car purchased is amedium emission car and so would be put into the main pool whereas the second is a high emission case and so would be put into the special rate pool.
Mirandus Accountants can help
In summary, the choice you make in the structure in which you hold property can have a significant impact on tax liabilities from the point of purchase through to the ultimate disposal of UK residential property. It pays to take the time to get the position right up front.Mirandus Accountants are an accounting company in London and Edinburgh who are tax accountants for the self-employed and offer accountant services and tax advisory services for small business. You can contact us for a tailored solution to your unique business circumstances.Whether you are an individual, freelancer, contractor or you run a small business, we can help to minimise your tax burden with our tax planning and tax advice services. That way, you can ensure you are only paying what you should be and nothing more.We strongly recommend you speak with a tax and accounting specialist like Mirandus Accountants, who can provide expert advice for your business and personal tax planning needs.
