Pay Less Tax And Improve Your Cashflow By Claiming All Your Capital Allowances
Businesses often miss out on claiming capital allowances that they are entitled to. This is because it can be a difficult topic to understand and there a mismatch between accounting and tax rules.
So what are Capital Allowances?
When you buy assets for your business, these reduce your profits but help you to pay less tax. Most assets you buy will qualify and they can range from things like equipment and research costs to expenses for building renovations.
In accounting rules assets are depreciated over the remaining useful life of the asset. They are charged to your profit and loss account accordingly.
e.g. a machine has a life expectancy of 10 years and costs £10,000. We could charge £1,000 to the profit and loss each year for 10 years using a straight line method.
In taxation rules all of the depreciation in the profit and loss account is added back. In the example above the £1,000 would be added back to the profit and loss account. Replacing this is then a system of capital allowances.
If assets are eligible, the annual investment allowance (AIA) or first year allowance (FYA) allows you to write off the total cost of the asset in one year.
i.e. the full £10,000 in the case above.
If capital allowances can not be claimed in full, then for the accounting year in which the expense incurred, they will qualify for writing down allowances (WDAs). WDA’s only allow tax relief at 6% or 18% of the expenditure per year on a reducing balance. It can take a while to obtain full tax relief on WDA’s but better to have it that not claim at all.
So what do you need to do?
You need to check all your assets to make sure you are getting tax relief. Seeing depreciation adjustments in your accounts is not tax relief.
Check your company Corporation Tax Returns and supporting schedules to see what you or your accountant has already claimed in capital allowances.
If your accountant does your company tax return ask them to provide you with a schedule you can check to make sure all assets have been considered.
If assets are missing from the supporting schedules it may just be that these assets are not qualifying for capital allowances. Always ask the question though because something could have been missed.
Assets that are typically missed are integral features such as integrated equipment e.g. new water, heating and lighting systems, or structural work changing premises to accommodate equipment.
TIP: It is never too late to claim for Capital Allowances as long as you still own the items and are using them in your business. The only limitation is for integral features with a building purchased after 31 Mar 2014. The person you obtained the building from has to have already recorded the features as qualifying assets.
NOTE: Late claims can not use the AIA or FYA. They have to be written down over a number of years.
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