What are capital allowances?
The accounting and tax treatment of assets you buy to use in the business (such as plant and machinery, cars or office equipment) are different. The depreciation charge shown in in your accounts is replaced for tax purposes by something called capital allowances (see below).
In your accounts, there will be a charge put through each year to reflect the 'wear and tear' of the asset - this is called depreciation.
So for example, if you buy a computer for £450 and expect it to last 3 years, your accounts will be charged with £150 each year. This better reflects the benefit you'll receive from the computer than writing off the whole cost in year 1.
For tax purposes, this depreciation charge is added back when calculating your taxable bill and is replaced by something called 'Capital allowances' which you claim as an expense deduction from your profits .
Broadly speaking the most widely claimed Capital Allowances are the Annual Investment Allowance (AIA) and a Writing Down Allowance (WDA). These are subject to change each year when the Chancellor announces his budget.
For most assets, you can claim a 100% tax write off using your AIA in year 1 - subject to an annual limit of £200,000 (as at June 2016).
However you can't claim AIA on the following:
- cars (although you can claim AIA on vans, lorries and trucks)
- items you owned personally before you started to use them in your business
- items given to you or your business
You'd need to claim WDAs instead on these items.
To claim WDAs you must first add together the cost of all the items you have bought according to the WDA percentage you can claim - this is then called a 'pool'.
There are 3 pools currently:
- main pool with a rate of 18% - this is the pool used for all assets which don't belong to pool 2 or 3
- special pool with a rate of 8%
- single asset pools with a rate of 18% or 8%
To find out what is included in each pool, just click here.
In addition, the percentage WDA for cars depends on their CO2 emissions. You can see the rates you can claim on business cars here.
This obviously means there will be a difference between your accounting profit and your taxable profit - and if you're trading as a limited company you may need to put through a 'deferred tax' adjustment to take account of the adjustments made when calculating your corporation tax bill.