First Year Tax Capital Allowances
Introduction
First year tax allowances give businesses the opportunity to reduce their corporation tax bill by off-setting some types of expenditure against their taxable profits during the first year after purchase. The allowance will depend on what is being purchased but can vary from around 6% to 100%.
By reducing tax on business profits, businesses can keep their cash flow healthy and can use the money saved to further fund the business. Just about all small businesses that currently pay tax on their profits (Corporation Tax Rates) can benefit from the scheme.
The following is a look at some of the most important areas of Capital Allowances for small businesses.
General Allowances
Small business can claim 50% (as opposed to 25% for large businesses) first year allowance on most capital expenditure for non long-life items, lowering to 25% for subsequent years allowances.
i.e. Items with a working life of less than 25 years from new. Long life items usually have an allowance of 6% per year.
There are some exceptions; cars and most machinery are not included, unless they come under the recent ECA efficiency allowances (see below). Land, residential buildings, and most commercial buildings are also excluded, as are a number of intangible items such as goodwill and Patents & Trademarks – Trademark. Goods which are leased out after purchase are also not applicable.
ECA (Enhanced Capital Allowances)
These are available for businesses that purchase specific types of efficient equipment; they allow 100% Capital Allowance for the first year. The equipment covered comes under four main categories:
Energy Saving Machinery, Plant, and Equipment – This includes specific energy saving models of items such as Boilers, Refrigeration Equipment, Lighting, Insulation and Motors.
Cars – This includes only cars with efficient levels of carbon dioxide emissions. The current maximum level is 120gm of Carbon Dioxide per kilometre; cars with emissions above this do not qualify for capital allowance.
Water Conserving Machinery and Equipment – This includes items such as water meters, leakage detection equipment, low flush toilets, and efficient taps.
Other costs – This includes direct transportation and installation costs, as well as some project management costs; as well as costs of altering an existing building to install energy efficient equipment.
Enhanced first year allowances are claimed in the same way as other capital allowances, through your self assessment or corporation tax return forms.
Buildings
If you construct or purchase a building within a designated Enterprise Zone, then you are allowed an Industrial Buildings Allowance of 25% a year, with most qualifying for 100% allowance in the first year.
If you construct or buy an unused building outside of these areas, there is no initial tax allowance; there is however a ‘Writing down Allowance’. This is usually 4% of qualifying costs, although this depends on the timescale and use of the building. This allowance does not apply to the costs of land, whether it is included or separate to the building costs.
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- First Year Tax Capital Allowances
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