Posted April 23, 2022

Super Deduction, Capital Allowances and Annual Investment Allowances

Everything you need to know about the Super Deduction, Capital Allowances and Annual Investment Allowance!

Have you ever wondered what capital allowances are?

Are you unsure whether you are eligible to claim the annual investment allowance?

Can you claim for a car?

Do you want to know about the new super deduction?

Our latest blog provides you with the everything you need to know about capital allowances.

What are capital allowances?

Capital allowances are a type of tax relief that is given to businesses when they buy certain assets that are used in the business. The assets must be owned by the business, in some situations leased assets may qualify but you should check with your accountant.

When a business prepares their accounts, they will deduct any business expenses from the income and pay tax on the profit. As assets are capitalised, they aren’t included in the deductible expenses, HMRC therefore allow the business to claim capital allowances on these items.

The business assets that you can claim capital allowances on include:

• equipment
• machinery
• business vehicles, for example vans or lorries

These are known as “plant and machinery”.

Depending on the asset, the business can deduct some or all of the value of the item from its profits before it calculates the tax.

Plant and machinery has a quite a wide definition so it is definitely worth researching or asking an accountant whether your asset is eligible.

What is the Annual Investment Allowance?

Introduced in 2008, Annual Investment Allowance (AIA) allows most businesses to claim their what they spend on plant and machinery. Between 1st January 2019 and 31 December 2021, the AIA limit was temporarily increased to £1 million, it is due to reduce back to £200,000 per annum from 31 March 2023.

The AIA allows the business to claim 100% of the cost of the qualifying expenditure on plant and machinery up to the annual limit. So, if the business buys equipment that qualify for the AIA, you can deduct 100% of the cost of that asset from its profit before you calculate the tax on that profit.

Not all assets are eligible for AIA so it is worth checking with your accountant whether any assets you have purchased are eligible. Broadly speaking, any cars, gifts or assets owned by you before you started the business are ineligible for AIA. Items that aren’t eligible for AIA will be eligible for a writing down allowance (WDA), in practice this is most likely to be any assets left over after you have claimed AIA (considering the current £1m limit) and cars.

What capital allowances can I claim for my car?

The date you bought the car and the car’s CO2 emissions will determine the capital allowance available and the rate of relief you can claim.

HMRC use capital allowances to encourage the use of more environmentally friendly cars.

There are three rates of allowances for cars bought after April 2021:

100% Rate – Brand new cars with zero CO2 emissions will attract a full 100% allowance (this is called the first year allowance);

18% Rate – cars with CO2 emissions below 50g/km or second hand cars with zeroCO2 emissions can claim 18% rate of capital allowances;

6% Rate – any cars with CO2 emissions higher than 50g/km will be placed in the special rate pool.

If the car has any private use, it will be put in its own pool as the amount you can claim will be restricted by the amount of private use.

What is the Super Deduction?

In the 2020 budget, the Chancellor announced that from 1st April 2021, a new super deduction corporation tax relief for limited companies.

The super-deduction allows a 130% deduction for qualifying expenditure on plant and machinery between 1st April 2021 and 31st March 2023, and a 50% deduction for special rate assets.

As with other capital allowances, the company cannot claim the super-deduction some types of leased equipment.

As with AIA, the super deduction is not available for cars, second hand or previously owned items.

If any assets are sold where the super deduction was claimed, there will be tax implication:

• for periods ending on or before 31 March 2023, the proceeds are taxed at 130% of the amount received, with periods straddling 1 April 2023 paying a hybrid rate
• for periods starting on or after 1 April 2023, proceeds remain taxable at 100% of the amount received.

If you have any queries on capital allowances, please get in touch with one of the team.