Very few businesses will operate without investing in capital assets of some type, those which will benefit the business over a range of accounting periods. These can include vehicles, equipment, plant and machinery, and land and buildings.
Broadly speaking, capital expenditure is not deductible in determining profits for tax purposes. The alternative, ‘revenue’ items are deductible.
However, all is not lost, and items classified as capital can obtain tax relief.
Capital Purchases and Tax Relief
Capital purchases are, instead, subject to capital allowances, at varying rates according to the type and nature of the asset.
A business can spend up to £200,000 on plant and machinery, excluding cars, per year and get 100% as a deduction from taxable profits.
Alongside this allowance for plant and machinery, other purchases can qualify for 100% relief, such as fully-electric cars and other green or energy-saving assets.
Careful planning can ensure that the annual 100% allowance is allocated to assets which would not ordinarily get a full allowance.
Plant and machinery additions (with some exceptions) in excess of that threshold go into a general pool, of which 18% is deductible against profits each year.
Cars do not qualify for the £200,000 annual allowance. Instead, the relief depends on their CO2 emissions. Electric vehicles qualify for a full deduction, while lower emitters achieve an 18% allowance, while heavier emission cars only get an 8% reduction.
The annual allowance can cover assets referred to as integral features and long-life assets.
Sole traders or partnerships should restrict their allowances to account for personal use. This restriction does not apply to employee use in a limited company, which is dealt with through the benefit-in-kind system.
Traders without a limited company can decide to reduce a capital allowances claim if it would lead to wasting personal allowances. This would leave a larger allowance for future periods when sufficient profits are made.