In this episode we will discuss the tax reliefs available through Capital Allowances. During the pandemic many used the forced closures as an opportunity to renovate offices or investment properties. This episode will cover reliefs available for plant and machinery, the new super deduction declared in the Spring Budget and other tips and tricks to consider when purchasing equipment. Enjoy.


Natasha 00:24
Hello and welcome to Tax Able. Today’s episode is called by the Whole Kit Caboodle and that is because we are focusing on Capital Allowances. Capital Allowances are available to sole traders, partnerships and companies so all of you can benefit. We will be discussing the difference between revenue and capital costs, why Capital Allowances are beneficial, and the benefits of the newly introduced super deduction. As a side note, please make sure you click subscribe to listen to the new episodes as they’re released.


Natasha 00:53
Revenue versus Capital Costs what are they? Why do you care? Well, whenever you buy new equipment for your office, renovate, repair or replace items, purchase any vehicles. The whole or part of the cost will be classified as either revenue or capital. The distinction is important as they are treated differently in your book and also for tax purposes.


Natasha 01:14
Let’s first take a look at capital costs and these are assets of your business. Typically, they are large one-off purchases rather than day-to-day business expenses. They’ll be listed on your balance sheet and are depreciated over their useful life. Now I may have said a few times you’re not familiar with, so please head on over to my Instagram page or YouTube channel for clarification.


Natasha 01:38
Examples of capital costs are office equipment (we’re looking at chairs, tables, shelving, etc), company cars and vans, kitchen and toilet, fittings, and plant and machinery. On the other hand, we’ve got your revenue costs and these are items that are used up in the business. The costs are shown in the profit and loss account as an expense and some examples are; repairs and maintenance, paper pens and small equipment with a short life.


Natasha 02:05
Here’s a tip for you. If you replace an item on a like-for-like basis and by this I mean there is no improvement to the item, then the cost will be revenue rather than capital. And let’s use windows as an example. If you have single glazed windows and you decided to replace them for double glazed, then you have made an improvement and that will be a capital cost. But if you have single glazed windows before and single glazed windows after, there has been no improvement. So that will be a revenue cost and this is important and you’ll see why a little bit later.


Natasha 02:37
Now it’s not always easy to separate your revenue from your capital costs, especially with big projects. So if you have performed a renovation or a fit-out, then you’ll need to make sure you’ve got the necessary level of detail for your advisor. If you have one contractor managing the project, then please make sure you ask them for a schedule of works as this will have the necessary amount of detail that we will need to split out the cost from one another.


Natasha 03:01
You are probably thinking about now why do you care? The cost goes somewhere in the account, so why does it matter? Well, revenue costs are treated as expenditure, so they are fully deductible for tax purposes. So this means you receive full relief from tax for the full cost of those items in the year of expense, whereas capital costs are a tad trickier as only some items receive tax relief through Capital Allowances.

Natasha 03:26
In my experience, I’ve found that capital allowance claims are often understated and this can result in taxpayers leaving behind valuable tax savings. So if we head back to the example used earlier about windows, you can see why it can be important to make sure you class your items as either capital or revenue.


Natasha 03:45
So what are capital allowances? You may or may not have heard of them. Well, capital allowances are akin to tax-deductible expenditure and they’re available for qualifying capital costs. This means for every £1 you spend, you get a £1 tax deduction. To receive full relief for the cost, you must either qualify for Annual Investment Allowance or AIA or First Year Allowance (FYA).


Natasha 04:07
Let’s look at AIA to begin with. This is set annually on a calendar year basis, so from the 1 January to the 31st December, which is not the tax year. The limit for 2021 was £1 million and this limit will be in place until 31 March 2023. The limit means that you can spend up to £1 million on qualifying items and receive full relief for those costs.


Natasha 04:34
But what doesn’t qualify for AIA? Well, unfortunately, cars and this is most commonly overlooked. So if you are thinking about buying a car, please be aware you may not get full relief for the cost. Also items you owned for another reason before you started using them in the business and items were given to you. If you spend more than the 1 million pound AIA limit, then you can still receive deductions through writing down allowances, but the relief is restricted and this means you still get the relief, but it’s in future tax years. Writing down allowances include 18% per annum for general pool items. Most items go in there or 6% per annum for special rate pool items.


Natasha 05:15
In addition to AIA, you’ve got your FYA and you also get relief for the entire cost. To qualify for FYA, purchases need to be green. By this, we mean environmentally friendly. So examples are some cars with low CO2 emissions, some energy-saving equipment, water-saving equipment or new zero-emission commercial vehicles.


Natasha 05:38
Here’s a tip for you. If you spend any money on a brand new electric vehicle, you don’t want it to reduce your AIA allowance. So you may want to make sure it’s classed as FYA and it’s important if you do say, for example, a fit-out in the year and you also want to buy a car in the same period, you want to make sure you can max out your benefits to get the most tax relief that you’re entitled to.


Natasha 06:01
Now we’ve gone through the two types of expenditure, your capital versus your revenue. If you do spend money on capital costs, you can receive relief through AIA, FYA or writing down allowances So as you have probably guessed, there’s always going to be some costs that do not qualify for any relief. This is a complex area and it has been discussed in the courts over the years, so it’s always best to seek advice before you start a project so you know what you will receive relief for and what you won’t as this will help your cash flow.


Natasha 06:32
So items that don’t receive any relief are called non-qualifying capital costs and these items which relate to the building structure itself rather than the items within it. Some examples are permanent walls, wooden or permanent flooring if you build any additional floors, roofs and windows. Now the reason you don’t receive any release through capital allowances is that these items are added to the cost of the building and you do receive relief until you sell the building in the future.


Natasha 07:03
Something that’s commonly overlooked as they are within the fabric of the building are integral features and although they’re within the building, they’re not the structure itself. So you’re probably wondering what on Earth am I talking about? Well they’re items such as electrical systems or lighting systems, cold water systems, any space or water heating systems. So your central heating, any ventilation, air cooling, any lifts, escalators or moving walkways and any external solar shading. If you do have any of these items and you are eligible to make a claim, then you can make substantial savings. Do not miss a trick and make sure you ask your adviser.


Natasha 07:48
Next, we’re going to look at the super deduction and this was announced in the budget last year. As from 1 April 2021 to the 31 March 2023, any companies investing in qualifying new plant and machinery can benefit from a special relief. So it’s only companies that can benefit as it’s a Corporation Tax relief. Unfortunately sole traders and partnerships, this part does not apply to you, but don’t switch off because you never know you might need it in the future.


Natasha 08:15
So what are the reliefs? The rates are 130% for general pool items and that pool only used to receive 18% per annum or 50% for special rate items and that pool used to only receive 6% per annum. Now you don’t get the additional percentages we just talked about on top of your AIA. Remember with AIA, you get 100% deduction. What I mean by this is if your cost qualifies for annual investment allowance, your AIA, i.e, it’s within your 1 million pound spending limit and it qualifies, you’ll receive a deduction for that cost and then you can elect to have an extra 30%, which means that you then reach 130% deduction.


Natasha 08:57
But what do we do about the 50% special rate items? Well, if you have AIA available, which you get 100% deduction for, you don’t want to opt for just a 50% deduction. This is only beneficial if you’ve already maxed out your AIA and you want to get an extra 50% on top that you’d normally only receive the 6%. Now I know I’ve said a lot of numbers in there, but basically, if you are investing in any equipment between the 1 April 2021 to the 31 March 2023 run, it past your advisor as you want to know whether you can benefit from this extra deduction and it will help with your cash flow.


Natasha 09:34
The one thing to take away from this is you are planning to do any large work or buy large pieces of equipment. Now is the time to do it, as this deduction is a one-off release and they’re probably not going to bring it back for a long time.


Natasha 09:48
As you’ve guessed, there are always certain conditions that must be met for the super deduction. The first one is only qualifies for new plant and machinery, so nothing second-hand, leased items do not count, you must purchase them outright and cars do not count, but commercial vehicles like vans will.


Natasha 10:09
Next, we’re going to have a quick look at what businesses can benefit from capital allowances. At the beginning of the podcast, I told you that sole traders, partnerships and companies can benefit. That is the case, but you’ve got to make sure you’re performing a trade. A trade means that you’re performing an activity with a view to make a profit and because of this distinction, sometimes rental businesses think they can’t claim allowances and that’s incorrect.


Natasha 10:34
Now, landlords make sure that you claim capital allowances too. Any landlord can make a claim including property companies, and yes, you can also benefit from the super deduction because the finance bill last year was amended to specifically include you.


Natasha 10:51.
So what should you be aware of if you do make capital allowances claims? Well, as always, HMRC may perform a check and that’s because you’re receiving relief from tax. So it’s important to ensure your claim is fully compliant and there is enough evidence and documentation available to support the deductions you’ve made. So make sure you get help from an advisor or a professional.


Natasha 11:11
We have reached the end of the episode and what can you take away from today? Well, first off, make sure you split your cost between capital and revenue. Secondly, don’t miss out on any extra release through Annual Investment Allowance or First Year Allowance as these will reduce the amount of tax you’ll pay. And thirdly if you are a company please make sure you check if you can claim the temporary super deduction.


*This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Please visit my disclaimers page. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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