Be sure you know the difference between 'capital' expenditure and 'revenue' expenditure and be careful when including the cost of capital assets in your accounts. Capital assets include buildings, goodwill, vehicles, tools, furniture and other plant or machinery used in the trade.
You cannot normally claim the cost of capital expenditure as an allowable revenue expense, but you might be able to claim capital allowances which will still give you tax relief on the expense. Depending on your circumstances, you cannot always claim the full cost in the year of purchase and there may also be a 'balancing charge' or a capital gains tax liability when you dispose of a capital asset.
Expenditure prior to trading
Expenditure on plant and machinery by a person about to commence trading is treated as incurred on the first day of trading at the purchase value. Assets previously owned by a trader then brought into the business at commencement or later are treated as bought at the market value at the date they are brought in.
Plant and machinery allowances
Capital allowances are available on capital expenditure on 'plant and machinery' used in a qualifying trade. Machinery is defined by its everyday meaning and plant is defined by:
- plant actively used in the business – 'qualifying'
- plant used in the setting in which the business is carried on – 'non-qualifying'. Eg general lighting in a department store is non-qualifying, whereas specialist display lighting is qualifying.
Land and buildings
You cannot claim capital allowances on buildings and land or any asset incorporated or normally incorporated into buildings, such as walls, floors, ceilings, stairs, doors, gates, shutters, windows and mains services. However, you can claim allowances for fixtures and fittings within buildings.
However, from October 2018, there is a new structures and buildings allowance for construction of property used in a qualifying activity.
Annual Investment Allowance (AIA)
Businesses are entitled to 100% AIA up to certain limit which depends on your circumstances. However, motor cars do not qualify for AIA but commercial vehicles do.
Writing down allowances
Writing down allowances are given on other capital expenditure. The rate of allowance depends on the type of expenditure, but is given on a reducing balance basis after any adjustments for additions or disposals.
Balancing charges occur when the disposal value of an asset exceeds the balance remaining unclaimed against the purchase cost of the asset. The charge is the excess and must be deducted from the total of any capital allowances being claimed.
Private use assets
Any asset which has an element of private use by a sole trader or partnership is put in a single asset pool and only the business proportion can be claimed as an allowance. However, this is not applicable to limited companies because the private use element is taxed under the benefits code.
Tax planning advantages
Correctly timing the purchase of capital assets such as vehicles, equipment and other plant or machinery can mean that you utilise your capital allowances efficiently. If you purchase equipment just before your year end date, you will retain full allowances for the next accounting period and receive the tax benefit on the purchase immediately.
If your business has generated losses or has low profits, it may be more desirable not to claim allowances in a particular year and carry them forward to future years. We can help you decide whether this might be appropriate to your circumstances.
Capital gains tax
Capital gains tax (CGT) might be payable if a business disposes of assets at a profit. 'Wasting assets' are normally exempt from CGT, but this is not the case if the asset has been used in a business and capital allowances have been claimed or could have been claimed. Please see the following page for further information about CGT: Capital gains tax
Further guidance about capital allowances can be found on the GOV.UK website:
This information is not meant as a substitute for professional advice and by no means covers every scenario. Almost every rule described here will be subject to many exceptions and caveats. Tax legislation is extremely complex and can be difficult to understand. You should discuss your circumstances with a qualified professional before acting on any information contained within this website. Tax legislation is constantly changing and the information contained within this website is written from our current understanding and interpretation of the tax system as of 6 April 2020.
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