Different Types of Capital Allowance - Accountants in Croydon

 Capital allowances are a (horribly) complex area of UK tax, yet claiming allowances wherever feasible can help a firm reduce its tax burden significantly.

To make matters even more complicated, multiple types of capital allowances are available, each with its own set of criteria, claim limitations, and thresholds.

Our Beginners Guide to Capital Allowances begins with the fundamentals, but continue reading to discover more about the many types of capital allowances:

  • Allowance for annual investment
  • Allowances during the first year
  • Super-deduction
  • Discounted rate
  • Allowances should be reduced.

What exactly is an annual investment allowance (AIA)?

The annual investment allowance (AIA) allows firms to claim tax breaks on assets purchased. You can use it to deduct the entire value of an asset from your profits before taxes.

Is there a cap on the amount of yearly investment allowance I may claim?

There is, indeed! In most cases, you can claim the AIA up to a maximum of £200,000 every year. This has been expanded indefinitely to £1,000,000 in order to encourage company investment. You might utilise it on a single large mega asset or across numerous.

When am I able to claim AIA for an asset?

You may only claim the yearly investment allowance for an asset in the fiscal year in which you purchased it. For AIA reasons, the purchase date is either:

If payment is due within four months, the day you signed the contract.

If the payment is due more than four months later,

What if I'm a VAT-registered business?

If your company is VAT registered, you may usually refund any VAT paid on purchases. This means you'll get the VAT back via your VAT return, and then the yearly investment allowance on the remainder.

  • Annual Investment Allowance (AIA) Overview
  • Deduct the full value of an asset.
  • You can claim up to £1 million every year.

What exactly is a first year allowance (FYA)?

First year allowances, like yearly investment allowances, enable you to claim up to 100% of the value of an asset (FYA). The distinction is that these products must be 'qualified.'

First-year allowance assets are often environmentally beneficial things such as:

  • New zero-emission commercial vehicles
  • New plant and machinery for usage in specific locations within business zones
  • Certain modern energy-saving and water-saving appliances
  • New automobiles with CO2 emissions of 75gms or less per kilometre
  • New gas refuelling device for vehicles

These things, as well as the yearly investment allowance, are eligible for first-year allowances. They don't count towards the AIA limit - yay!

First Year Allowances (FYA) in a Nutshell

  • Deduct the full value of an asset.
  • Claim both the FYA and the yearly investment allowance.

What exactly is the super deduction?

The super deduction is a form of capital allowance that is valid until March 31, 2023. Instead of claiming 100% of an asset's worth, you can claim 130% with the super deduction. It can only be used for:

  • It is available to organisations that pay corporation tax, such as limited corporations, but not to sole proprietors or partnerships.
  • Qualifying assets purchased between 1 April 2021 and 31 March 2023 utilising the capital allowance definition of a purchase date.

There is no maximum on the super deduction, unlike the AIA, which has a £1 million restriction.

What does the Special Rate allowance entail?

The Special Rate (SR) allowance is a super deduction alternative for assets that do not qualify for the main rate pool (we explain how 'pools' operate below!)

This category includes assets that qualify for the 6% special rate pool, such as building vital features and long-life assets.

Businesses can deduct 50% of the qualifying cost in the first year, with the remaining balance entering into the special rate pool for following tax years.

The special rate allowance, like the super deduction, has no maximum.

Writing Down Allowance

If you are unable to use the yearly investment allowance, you can employ 'writing down allowances.' This might be because you've exhausted your AIA or the asset does not qualify for the annual investment limit.

When claiming write down allowances, assets are assigned to what HMRC refers to as 'pools.' These determine the allowance rate that the asset is eligible for. The various pools reflect the types of wear, tear, and depreciation that an item may experience.

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