When running a company, you may be most concerned with turning a profit or developing your capital, depending on the nature of your business and your priorities.
Naturally, there will be taxes to pay and these will be based on both the income and capital elements of your business. How much tax you will pay will be calculated on your income less any day-to-day running costs, and on your capital less any capital expenditure.
Day-to-day running costs are known as ‘revenue spending’ and include things like rent, stock purchases, utility bills, staff costs and repairs. This is different to ‘capital expenditure’, which is what Capital Allowances relate to.
What is capital?
Depending on the nature of your business, it may have or build up ‘capital’ (sometimes known as ‘fixed assets’), which is equipment used to run your business. This might be a van, laptop, office furniture, premises (that are owned by the company) or tools – these are known as ‘plant and machinery’.
What is capital expenditure?
When you buy a capital asset, this is known as ‘capital expenditure’. Capital expenditure cannot be offset directly against your income but it can attract a ‘Capital Allowance’, which deducts the cost of your capital expenditure from your profit before tax is calculated.
There can be uncertainties about whether an item is classed as a capital asset or simply an item bought as part of your normal running costs, and generally the cost of the item (when considered alongside the overall size and value of your company) will determine this. If in doubt, a financial advisor who is familiar with your trade and individual company can help to clarify this for you.
What are Capital Allowances?
You can deduct from your company’s profits the full value of most types of capital assets before tax is calculated.
You can claim Capital Allowance for your company’s plant and machinery, research and development, intellectual property and certain other capital assets.
Whatever you paid for the asset (or its market value) can be deducted from your company’s profit through an Annual Investment Allowance (AIA) up to a value of £200,000*, greatly reducing your company’s tax liability.
If it is your company’s first trading year, you can deduct the full value of certain capital assets (typically those that are good for the environment) from your profits regardless of their cost.
AIA cannot be claimed for cars, but these plus any capital expenditure over £200,000 may instead be deducted using ‘writing down allowances’.
Writing down allowances enable you to deduct a percentage of the value of certain capital assets from your income in that financial year.
For example, your company car may be worth £20,000 when you buy it as a capital asset, but each year its value will lessen through depreciation.
Through a writing down allowance you could deduct the amount it has depreciated in value from your company’s income.
The capital value of the car, though, cannot be deducted from your income through AIA.
Capital Allowances are a potentially very good way to reduce your company’s tax liability. If you are in any doubt as to whether an asset belonging to your company could be used in this way, then seek expert advice to minimise your tax spending.
Find out more information about Capital Allowances on the Gov.UK site.
* The AIA has been temporarily increased from £200,000 to £1m from 1st January, 2022 to 31st March, 2023.
Read our complete guide to company expenses to see what else you can offset against your company’s tax bill.