WRITING DOWN ALLOWANCES: Most businesses will buy assets as part of their operation. Business assets fall under capital allowances rules in accounting.
In most cases, you get to deduct the full value of an asset from the company profits before tax.
This is a special process called the annual investment allowance (AIA). In some cases, items also qualify for ‘first year allowances‘.
But, there are certain situations where you cannot use the AIA process. This is when you should use writing down allowances instead.
Typical reasons for using the written-down value of an asset would be:
- If the asset does not qualify for annual investment allowance. Examples include business cars and gifts. The same applies to items ‘previously’ owned before using them in the business.
- When you already claimed the AIA on items and the total comes to more than the AIA amount.
Using writing down allowances is not the same as claiming capital allowances. WDA means you get to deduct a percentage (not the full amount) of the asset value.
The writing down allowance gets deducted from the business profits each year. The actual percentage you can deduct will depend on the specific item. But, CO2 emissions determine the WDA rate for company cars.
How to Work Out the Value of an Asset
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 acquired the item as a gift from someone.
- You already owned the item before you started to use it in the business.
Capital Allowance Rates and Pools
You will need to group things you bought for the business into ‘pools’. The rates and pools for capital allowances get based on the percentages they qualify for.
Work Out What You Can Claim
You will need to determine the writing down allowance rates for each item. This helps you work out what you can claim so you can deduct it from the profits. The final step is working out how much you can claim before sending in the business tax return.
Note: There may be an amount left in each pool after you complete the capital allowance workings. This amount would then become the new ‘starting balance’ in the next accounting period.