Having a grasp on capital allowance is essential for any business to maximize its profits and reduce the amount of tax they owe. Capital allowances are deductions that can be claimed against taxable income, which can help businesses lower their overall tax bill. But understanding how capital allowances work isn’t always easy. Starting with these six useful pieces of information about capital allowance should help you understand everything you need to know before filing your taxes. From eligibility criteria to types of assets eligible for the deduction, you can make sure your business is taking full advantage of available deductions when filing taxes each year.
1. Eligibility Criteria
An important factor to consider when looking into capital allowance is whether or not your business meets the criteria for eligibility. Generally, businesses need to have purchased specific items such as buildings, structures, machinery, and equipment to be eligible for the deduction. Additionally, the asset must be used “wholly and exclusively” to carry on a trade to be eligible. If you’re not sure about how to pass the criteria, Capital Allowances Specialists can help you with the process. You might be surprised to know that certain items such as motor vehicles, buildings purchased before April 1st, 2008, and leased assets are not eligible for the deduction.
2. Types of Capital Allowance
Another important aspect of capital allowance is understanding the types available and which deductions apply to your business. For example, Annual Investment Allowance (AIA) allows businesses to claim 100% tax relief on qualifying expenditures up to a maximum of £200,000 per year. This type of allowance is perfect for small businesses that want a quick return on their investment without having to wait for long-term allowances or annual claims. Other types of capital allowance include Structures & Buildings Allowance (SBA), Enhanced Capital Allowances (ECA), and First Year Allowances (FYA).
3. Capital Allowance for Existing Assets
Your business may also be eligible for the capital allowance if you own existing assets. This can include buildings, structures, fittings, and fixtures that were purchased before April 1st, 2008. In such cases, the Allowable Costs method is used to calculate the amount of tax relief available. This involves taking a percentage of the cost of each asset as a deduction from taxable profits in a given period – usually four years or less depending on the age of the asset. For example, if an asset was purchased in 2004 with a cost price of 10,000 pounds then a percentage of this cost could be claimed between 2004 and 2007 as a capital allowance.
Additionally, if you have made any improvements or repairs to the asset during this period, then you can also claim for these costs. To claim Capital Allowance on existing assets, your business must be able to provide sufficient evidence of their cost and age. You should also be aware of any limits on the amount that can be claimed as this may vary depending on the type of asset in question. This information can usually be found in the relevant tax legislation or guidance notes issued by HM Revenue and Customs (HMRC).
4. Claiming Capital Allowance
When it comes to claiming capital allowance, the process can be complex and time-consuming. Businesses will need to fill out a detailed form, keeping track of all receipts and invoices related to the asset to make sure they get the full amount of relief due. Additionally, businesses may need to provide evidence that the assets were used “wholly and exclusively” for business purposes – often visiting an inspector necessary. Luckily, some firms can help with this entire process from start to finish. In the end, careful planning and research is the best way to make sure that your business takes full advantage of all available deductions when filing taxes each year.
5. Maximizing Tax Relief
The key to taking full advantage of capital allowance is understanding how best to maximize the tax relief available for your business. For example, businesses with large investments in plant and machinery may be able to use the Annual Investment Allowance to reduce their overall tax bill. This can provide a quick return on investment without needing to wait for long-term allowances or annual claims. Additionally, businesses should consider claiming additional deductions such as Research & Development credits, National Insurance contributions, and capital gains tax reliefs which could all help lower the amount of taxes owed each year.
6. Keeping Records
Businesses need to keep accurate records when dealing with a capital allowance so that they can get the full amount of relief due from HMRC (Her Majesty’s Revenue & Customs). This includes keeping detailed paperwork regarding asset purchases including invoices, purchase orders, and delivery notes. Businesses should also keep track of the depreciation of assets, as well as any disposal or transfer of assets to ensure accuracy when submitting claims for tax relief. Some steps that businesses should take to ensure proper recordkeeping include:
- Keeping detailed records of all asset purchases and sales, such as invoices and delivery notes.
- Creating a capital allowance schedule for each asset purchased, which includes the purchase price, estimated useful life, depreciation rate, and the total amount of capital allowances claimed.
- Tracking any transfers or disposals of assets to accurately calculate the appropriate tax relief.
- Maintaining accurate depreciation schedules for each asset to make sure the proper amounts are being deducted from profits.
- Storing all documentation related to capital allowance claims for at least six years after filing the claim with HMRC. This is important if HMRC requests additional information or has questions about the claim.
Capital allowance is a complicated yet beneficial way for businesses to reduce their taxable profits and claim back money from HMRC. Understanding how to qualify for the capital allowance, what types are available, and how to maximize tax relief can help your business stay on top of its finances while saving time and money in the long run. With the right advice and guidance, you can make sure that your business gets the most out of these deductions while avoiding any potential fines due to incorrect or incomplete paperwork.