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You may also wish to consider the optional cash basis for calculating taxable income for small businesses, which allows eligible self-employed individuals and partnerships to calculate their profits on the basis of the cash that passes through their business. Businesses are eligible if they have annual receipts
of up to £150,000 and they will be able to continue to use the cash basis until receipts reach £300,000. This is something we should discuss with you in detail if you are eligible. Allowable payments include most purchases of plant and machinery, when paid, rather than claiming capital allowances.
Unincorporated businesses are able to choose to deduct certain expenses on a flat rate basis. However, this is worth discussing before opting for it, as the flat rates are not generous.
Capital allowances
‘Capital allowances’ is the term used to describe the deduction we are able to claim on your behalf for capital expenditure, such as business equipment, in lieu of depreciation.
Annual Investment Allowance (AIA)
The majority of businesses are able to claim a 100% Annual Investment Allowance (AIA) on a portion of expenditure on most types of plant and machinery (except cars). The AIA applies to businesses of any size and most business structures, but there are provisions to prevent multiple claims.
The AIA temporarily increased from £200,000 to £1 million for three years from 1 January 2019 to 31 December 2021 and
will revert to £200,000 from 1 January 2022. Businesses with accounting periods which straddle 1 January 2022 will need to calculate a hybrid allowance using the two rates. It is therefore important to time the purchase of plant and machinery carefully, in order to make the most of the increase.
Businesses are able to allocate their AIA in any way they wish, so it is quite acceptable for them to set their allowance against expenditure qualifying for a lower rate of allowances (such as integral features).
Plant and machinery – super-deduction
Between 1 April 2021 and 31 March 2023, companies investing in qualifying new plant and machinery will benefit from new first year capital allowances.
Under this measure a company will be allowed to claim:
y a super-deduction providing allowances of 130% on most new plant and machinery investments that ordinarily qualify for 18% main rate writing down allowances
y a first year allowance of 50% on most new plant and machinery investments that ordinarily qualify for 6% special rate writing down allowances.
This relief is not available for unincorporated businesses.
Writing Down Allowance (WDA)
Any expenditure not covered by the AIA or super-deduction generally enters either the main rate pool or the special rate pool, attracting WDA at the appropriate rate – 18% and 6% respectively for 2021/22.
The special rate pool applies to higher emission cars, long-life assets and integral features of buildings, specifically:
y electrical systems (including lighting systems)
y hot and cold water systems
y space or water heating systems, powered systems of ventilation, air cooling or purification and any floor or ceiling comprised in such systems
y lifts, escalators and moving walkways y external solar shading.
For most other plant and equipment, including some cars, the main rate applies.
A WDA of up to £1,000 may be claimed by businesses where the unrelieved expenditure in the main pool or the special rate pool is £1,000 or less.
Enterprise Zones
Designated sites within Enterprise Zones qualify for enhanced capital allowances. In these sites, 100% First Year Allowances are available for expenditure incurred by trading companies on qualifying on new energy saving or environmentally friendly equipment.
Cars
The tax allowance on a car purchase depends on CO2 emissions. Under current rules, purchases of new unused cars with
zero emissions attract a 100% first year allowance. For cars purchased with CO2 emissions up to 50g/km, the main rate of 18% applies. Cars with CO2 emissions above 50g/km will be restricted to the special rate WDA of 6%.
For non-corporates, cars with a non-business use element
are dealt with in single asset pools, so the correct private
use adjustments can be made but the rate of WDA will be determined by the car’s CO2 emissions. Remember, cars do not qualify for the AIA or FYA.
Buildings
When a building is purchased for business use, it may be possible to claim capital allowances on plant elements contained therein, e.g. air conditioning, subject to certain conditions. A joint election may need to be made with the vendor. Please contact us for further details and advice prior to any purchase.
The Structures and Buildings Allowance is available on new, or the renovation of old, non-residential structures and buildings. Relief will be provided on eligible construction costs incurred on or after 29 October 2018, at an annual rate of 3% on a straight-line basis.
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