Capital Allowances are tax reliefs that allow businesses to deduct the cost of certain capital assets from their taxable profits.
All businesses can claim capital allowances on qualifying assets that they buy and keep to use in their business.
The most common assets that businesses purchase and qualify for capital allowances are:
- Machines, equipment,
- Certain fixtures,
- Cars, Vans,
- Computer, printer, etc.
The assets that will not qualify for capital allowances include the cost of buildings or property and the assets acquired through hire purchase or lease.
Two different types of capital allowances are available:
a. First Year Allowance (FYA-100%)
If a business buys an asset that qualifies for first year allowance then the business can deduct the 100% cost of asset as business expense from profit before tax. This is called first year allowance.
The following expenditure will qualify for a FYA:
- energy saving, water efficient and vehicle gas refueling equipment
- New cars with carbon dioxide (CO2) emissions of 75g/Km or less.
First year allowances are in addition to annual investment allowance i.e. FYA doesn’t reduce AIA limit.
b. Annual Investment Allowance (AIA)
Annual Investment Allowance (AIA) is also a tax relief available on purchase of most plant and machinery expenditure. It is a business expense which can be deducted from profit before tax. AIA is limited up to £200,000/-pa. Any additional capital expenditure will qualify for written down allowance (WDA) i.e. 8% or 18% depending on the type of asset.
AIA is not available on all business assets like cars and the asset that has been used somewhere else before bringing into the business e.g. a family laptop.