Friday's Fortnightly Tax Tip
When a business purchases an asset such as furniture, equipment, machinery or motor vehicles, the purchase will be analysed as capital expenditure.
In the accounts, depreciation may be included as an expense, which in turn reduces the value of the asset in the balance sheet.
However, depreciation must be added back to profits on the tax return and capital allowances are then used instead,. Capital allowances are basically HMRC approved rates of depreciation.
Below is a list of the more common capital allowances which we use, (this list is not exhaustive, if you would like more information, please click here).
Annual Investment Allowance (AIA): This would usually be claimed on plant and machinery, equipment, certain vehicles (not cars) and more. This allowance is 100%, so the full cost of the asset would be deducted from your profit for the year. Note that this allowance is available for up to £1 Million in assets for the year, once that is used the assets will be subject to WDA.
Writing Down Allowances (WDA): This is most commonly used for cars and for any other assets that don’t qualify for AIA, the allowance is either 18% or 6%, depending on the type of asset, for example a car with CO2 emissions over 50g/km would receive the 6% allowance.
There are also full expensing and first year allowances (100% and 50%), these are allowed for certain new and unused assets in the year they are bought. Please note that only companies can use full expensing and the 50% first year allowances.
When selling an asset after using capital allowances, there may be a balancing charge or balancing allowance.
For example if you used AIA on the purchase of an asset, this reduces the assets tax value to £0, so if it was then sold for £1,000, this leads to a balancing charge of £1,000, which should then be added back to your profit.
It could also go the other way, for example if you used 6% writing down allowances on a car and the written down value of the car is £5,000, but you sell the car for £2,000, you should then receive a balancing allowance of £3,000, which would be deducted from your profit for the year.
Also note that if an asset has private use, then a restriction is imposed on the capital allowances, the restriction depends on the percentage of private use.
If you need any tax advice in Milton Keynes give a call to the team at Holmes Accountancy on 01908 315716 or contact us here.
The tax tip is provided for general guidance only; further advice should be sought, for specific issues.
Share this post: