If you purchase an asset through your company (such as a new PC), the cost of the asset is written off over a period of time, unlike a business expense. So, how are capital assets treated in the company accounts?, and what are capital allowances used for?
Accounting for capital assets
Unlike low-value standard business expenses, higher value company purchases (such as office equipment) are held as assets on the company’s balance sheet, with their value depreciated over time, reflecting the value of the asset to the company over its lifetime, rather than its resale value. The depreciation charge appears on the company’s profit & loss account as an annual expense.
Company assets are not tax-deductible, and the depreciation charge is not allowed for tax purposes. Instead a system of ‘capital allowances’ exists which enables companies to obtain tax relief on the value of purchases subject to various limits and conditions.
Capital allowances can be claimed by all types of business – sole traders, partnerships, and limited companies. If you’re self-employed, you will account for capital allowances via your personal tax return (if a sole trader), or partnership tax return (if you’re a member of a partnership). If you’re a company director, your accountant should make any claims via the company’s tax return.
Capital allowances – qualification rules
For most of our readers, the main type of capital allowance that will apply is for ‘plant and machinery’ items, which includes almost all business-related equipment, such as computers, office furniture, and machinery. The notable assets not covered by the capital allowance rules are cars, land, and buildings.
Various conditions apply before you can claim the allowance:
- They must be assets used by the business on an ongoing basis, not goods purchased for resale.
- The asset must be expected to serve a useful purpose for at least 2 years.
- The asset must be used purely for business purposes.
The percentage capital allowance will vary according to the type of business expense. Some expenditure qualifies for 100% relief (to encourage businesses to invest) – for example, spending on energy-saving, and environmentally-friendly equipment, or the purchase of low-emission cars.
Annual Investment Allowance
Assets which fall under the definition of ‘plant and machinery’ (including office equipment) receive 100% tax relief against your company’s profits for tax purposes, on the first £500,000 of qualifying expenditure.
This limit, announced during Budget 2014, took effect from 1st April 2014, however the Chancellor did not announce an extension during Budget 2015, so this £500,000 limit could theoretically end on December 31st 2015 and revert back to £25,000 (however unlikely this may seem).
Find out more in our dedicated March 2015 article on the future of the AIA threshold.
Prior to the Budget 2014 increase, the AIA limit had been increased from £25,000 to £250,000 from 31st April 2012 until the end of March 2014.
Find out more about this temporary increase to the AIA via this GOV.UK PDF document.
The way capital allowances are accounted for are relatively complex, so make sure you talk to your accountant before making a significant investment in business equipment.
For a complete guide to capital allowances, what is (and what isn’t) qualifying expenditure, and the various allowances available aside from the AIA, read this HMRC guide.