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How to Claim Capital Allowances

Understanding the rules and procedures of claiming capital allowances is key in business. This guide explains how to claim capital allowance relief on business assets to pay less tax. The topics clarify what you can claim capital allowance on and how the annual investment allowance works. Find out how to use writing down allowances to work out what AIA you can claim.

CLAIM CAPITAL ALLOWANCE

Part of successful business management involves the purchase of assets.

You can claim relief on ‘plant and machinery’ if it get used in the business, such as:

  • Business vehicles (e.g. cars, vans, or Lorries).
  • Equipment
  • Machinery

As a rule, you will deduct some of the value of the asset (or all) from the business profits before paying tax.

Note: There is a cash method of accounting called cash basis. Sole traders or partners with a £150,000 (or less) income per year may find the cash basis system simpler to use.

Working Out the Value of an Item

The value of an item is usually the same as the price you paid for it. But, there may be occasions when you need to use the market value instead. Thus, use the amount you would expect to sell it for if either:

  • You already owned the item before you started to use it in the business.
  • You acquired the item as a gift from someone.
Claiming for other Business Costs

You claim for capital allowances in a different way than you do for the other business costs. Typical expenses that are ‘not business assets‘ include:

  • The day-to-day running costs of the business.
  • Finance costs or interest payments used for the purchase of business assets.
  • Products that get bought and sold as part of regular business trading.

    • A sole trader or a partner would claim this type of cost as business expenses (not business assets). Whereas, if you are running a limited company you would deduct them as expenses from the profits.

Claiming for other Capital Allowances

Besides business plant and machinery, you can also claim capital allowance relief for:

  • Dredging.
  • Extracting minerals.
  • Patents.
  • Renovating business premises located in disadvantaged areas of the United Kingdom.
  • Research and development.
  • Some intellectual properties on industrial techniques or ‘know-how’.
Letting Out a Residential Property

Different rules on capital allowances apply to items in residential property. To claim reliefs the operation must qualify as a furnished holiday lettings business. That means, each year the residential property must:

  • Be available for holiday letting for at least 210 days.
  • Be let out for at least 105 days.

Claiming Capital Allowance Relief

There are several ways of claiming the relief. You need to work out the capital allowances and then claim it using the method that applies to you:

Note: The amount that you can claim gets deducted from the business profits. But, when employees claim tax relief they use a different method.

When to make a Claim

Claim the reliefs in the same accounting period that you bought the item to claim the full value under:

  • Annual investment allowance (AIA).
  • First year allowances.

You can also claim part of the value using ‘writing down allowances‘. That works best when you are not claiming the full value. You can carry out this method any time providing you still own the asset.

For the purpose of capital allowance rules and procedures the date you bought the item would be:

  • When you signed the contract (if payment is due within less than 4 months).
  • When the payment is due (if it is due more than 4 months later).

What if you buy a business asset under a hire purchase contract? In this case you can claim for the payments ‘not yet made’ when you start using the item. But, you will not be able to make a claim on the interest payments.

ALSO IN THIS SECTION

What Can be Claimed?

Many businesses need some type of ‘plant and machinery’ to operate. Those that do, can claim capital allowances on the items kept for use in the business.

Note: You need to work out how much you can claim for items that do not qualify for AIA or for first year allowances. It is not necessary for items that do qualify because you would claim the full cost.

Annual Investment Allowance

Check which items qualify for the Annual Investment Allowance (AIA). Further information explains how to deduct the full value of qualifying items before paying tax.

Business Cars

Capital allowance is claimable on company cars bought and used by the business. Learn how to deduct part of the value of business cars from company profits before you pay any tax owed.

When Selling an Asset

The section explains capital allowances when you sell an asset or give one away. Check how to work out the value after you dispose of an asset that you claimed capital allowances on.

Claiming Business Capital Allowance Relief in United Kingdom