What Are Capital Allowances and How Do They Help Lower My Businesses Tax Liability?
Capital allowances are a tax-deductible expense to a business and consist of three elements enhanced capital allowances (effectively a form of a first year allowance), writing down allowance and annual investment allowance. A fixed asset is an asset used in the business that has an expected useful lifespan within the business of a year or more, this is recorded on the balance sheet of the business and we need to write this off to the profit and loss account as the items value reduces. When preparing business bookkeeping we write down the value of a fixed asset using depreciation however depreciation is not tax-deductible and must be added back to our profits in the tax computation. We still need to be able to claim this expense against our profits for the purposes of calculating our tax liability. The process used is capital allowances.
Some fixed assets are allowable to a claim of annual investment allowance up to the annual limit and if this is applicable you can write the whole value off by using a 100% deduction and leave its effective value as nil for the purposes of our tax calculation, this as you will appreciate is much better than the 20% or 30% that a business might use as depreciation. The benefits to the business owner is the depreciation is lower than the annual investment allowance and allows us to retain some of the value of the asset in our accounts while giving full tax relief for the value of the asset in the first year and as such lowers the tax liability improving business cash flow.
If an asset is not available for annual investment allowance some of these items include cars, items given to the business or items owned by the business owner before they were used in the business, or the business has purchased a higher value of assets than the annual investment allowance limit then it can be written down for the purposes of tax calculation by enhanced capital allowances in year one and writing down allowance in subsequent years.
If the asset is not used wholly and exclusively in the business then the allowances may need to be reduced accordingly, so for example if you buy some equipment to use in your business and you use it half of the time in the business and half of the time for personal use then you may need to reduce the available allowance by a half so for the example of annual investment allowance you would then only be able to claim half of the value of the asset in the tax computation.