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Capital Allowances - A small business guide

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You often hear people running small businesses complaining about the business tax burden in the UK.

Yes it’s true that with Corporation Tax, VAT and business rates there is a lot to pay (and a lot of paperwork to go with it). But there are also lots of tax schemes to encourage people to invest in businesses.

One such scheme is called capital allowances. When you buy certain new equipment, invest in buildings or research and development, you can deduct a proportion of the cost from your taxable profits and reduce your business tax bill.

This can be a huge boost to your business, especially as you need to invest to fund growth.

Here’s a look at the main elements of the capital allowances scheme and how you may be able to use it to benefit your business. As with all financial matters, your business may not be a clear cut case, so you should check with your accountant before taking any action.

Plant & Machinery

Starting with the first capital allowance category, called ‘plant and machinery’. This is a little misleading, as there are actually items in here that every business buys, especially those starting up.

You can claim for the cost of:

• Vans and cars
• Machines or plant
• Tools and essential items like scaffolding
• Furniture
• Computers
• Some other equipment you need

Sometimes you can also claim for items you used privately before using them in your business. For example if you had a home computer that you transferred to the business when you started up, you might be able to claim for that.

You’re not able to claim for anything you buy or sell on a day-to-day basis as part of your trade. The whole point of this scheme is to allow you to offset the “one off” purchases, not the trading expenses.

For the items listed, the standard allowance is 25 per cent each year. This is going down to 20 per cent from April 2008.

You can also claim an additional allowance in the first tax year after you bought the equipment. This gets complicated, but it is 50 per cent for small businesses in the tax years ending in March 2005 and March 2008. Medium-sized businesses can only claim 40 per cent. And in some cases you can claim up to 100 per cent.

You can read the fine details of all the Capital Allowance schemes on the HMRC site.

From the 2008/2009 tax year, all businesses will be given something called an Annual Investment Allowance of the first £50,000 of expenditure on plant and machinery.

Buildings

Moving onto capital allowances on buildings. You can claim for constructing industrial or agricultural buildings, commercial buildings in enterprise zones and certain types of hotel. There are also allowances for buying or constructing a building for what’s known as a ‘qualifying trade’ such as manufacturing or processing.

Amazingly, you can also claim for renovating or converting space above shops and other commercial premises into flats to rent out.

However you can’t claim on the cost of houses, offices, shops or showrooms, or the cost of buying the land itself (including buying a freehold property or taking on a lease). Extensions also aren’t covered, and while you can claim for developing flats, you can’t claim for furnishing them.

Again, the allowance rules are complicated. But basically you can claim 100 per cent of the construction cost of vacant space above commercial premises into flats, and building commercial and industrial buildings in enterprise zones. Some of the allowances outside of enterprise zones are being phased out, and will be gone by the 2010/2011 tax year.

Research & Development

The final capital allowance scheme is to encourage research and development. If the research is relevant to your business and involves creativity and innovation in science and technology, you can claim up to 150 per cent tax relief. This is going up to 175 per cent in the 2008/2009 tax year.

If you need help identifying the capital allowances your business could be eligible for, the Business Link website has an interactive tool. You just need to spend a few minutes answering the simple yes/no questions, and it will give you an idea if you can make a claim.

The tool covers all of the different allowances available. You should of course use this tool as a guide only.

Remember to get professional advice from a qualified person before taking any action. Don’t rely purely on information contained in this article.

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Posted October 30, 2007