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Capital Allowances

At Blondie’s accountants of Manchester we appreciate that not all business owners understand exactly what Capital Allowances are.


Below, as Manchester accountants who like to use Layman’s terminology so that you are not confused, we firstly give a simple explanation, followed by the up to date Financial numbers and percentages:-


You’re likely to buy equipment to use in your business, that’ll be useful for more than about a year.


If you’re a freelance web designer, that’d be your computer, desk and chair.


If you’re a dressmaker, it’d be your sewing machine.


This equipment is sometimes called “fixed assets”, or, as we call it in Free Agent, “capital assets”.


Why “capital assets”?


Because, when you spend money on these assets, HM Revenue calls that “capital expenditure”, as distinct from the day-to-day running costs of your business which are called “revenue expenditure”.


Why do I have to separate these out?


They’re treated differently from day-to-day running costs, both for tax purposes and in your accounts. More about that in a moment.


Is there a lower cost limit for when an item becomes a capital asset? 


HM Revenue hasn’t set one. If you have a Manchester accountant such as ourselves, we might have a set limit.


But usually it’ll depend on your business’s size. For example, a £25 phone would almost always go into Internet and Telephone as a day-to-day running cost. A £250 phone system would be a capital item for a small business, but probably a day-to-day running cost for a larger one.


How are capital assets treated in my accounts? 


Because the asset’s going to be useful to your business long-term, it goes on to your business’s balance sheet.


But every year, the business will use some of the asset’s value up, and if you try and sell the used asset, you won’t get as much for it as you paid for it when it was new.


To allow for the using-up of the asset’s value, a bit of it has to be deducted from your business’s profit each year.

This is called “depreciation”, and in Free Agent it’s worked out for you automatically.

 

That’s accounts, what about tax? 


HM Revenue say that depreciation isn’t an allowable expense for tax, so you have to add it back when you’re working out the profit that your business will pay tax on.


So don’t I get any tax relief for buying assets? 


Yes you do. It’s just handled differently and we at Blondie’s Manchester accountants maximise the benefit to you.

HM Revenue calls it “capital allowances” - a tax allowance for your capital expenditure.


What are capital allowances, and how do I claim them? 


Let’s start by looking at new assets your business buys.

Currently there is an Annual Investment Allowance (AIA) available, which from 1st April 2010 (for companies) or 6th April 2010 (for sole traders and partners) is £100,000 a year.(see latest figures for 2011 below:-


Hope that explains the subject for you – if still confused. Contact us at Blondie’s Manchester Accountants.


Plant and machinery - Annual Investment Allowance (AIA)

The AIA gives a 100% write-off on most types of plant and machinery costs, including integral features and long life assets but not cars, of up to £50,000 p.a. The limit is increased to £100,000 for expenditure incurred on or after 6 April 2010 (1 April 2010 for companies). Special rules apply for accounting periods straddling these dates.


Any costs over the AIA fall into the normal capital allowance pools at either 10% or 20%. The AIA may need to be shared between certain businesses under common ownership.


Other plant and machinery allowances


The annual rate of allowance is 20%. A 10% rate applies to expenditure incurred on integral features and on long life assets.


A temporary 40% first year allowance may be due for certain expenditure exceeding the AIA incurred in the 12 month period beginning on 6 April 2009 (1 April 2009 for companies). A 100% first year allowance may still be available on certain energy efficient plant and cars.


Cars


For expenditure incurred on cars on or after 6 April 2009 (1 April 2009 for companies), costs are generally allocated to one of the two plant and machinery pools. Cars with CO2 emissions not exceeding 160gm/km receive a 20% allowance p.a. Cars with CO2 emissions over 160gm/km receive a 10% allowance p.a.


Industrial and agricultural buildings and hotels


The annual rate of allowance is 1% (2%) from 6 April 2010 (1 April 2010 for companies). Special rules apply for accounting periods straddling these dates.

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