Tax relief on capital costs

Capital expenditure is that required for the business to run long term. Capital costs are distinguished from revenue costs which are those used up by the business immediately. The tax system attempts to tax profits so the income is matched with costs required to generate that income, in each period. Therefore revenue costs, such as on workforce and premises, are straightaway deducted from profits. By contract, capital costs, such as on furniture and vehicles can be deducted from profits over several years. Capital allowances are the amounts taken off tax adjusted profits for capital outlay.

The rate of capital allowances has varied frequently in recent years. At present, an annual investment allowance permits a 100% deduction in year one on most capital expenses up to a limit of £100,000 (or £25,000 from April 2012) to be deducted from taxable profits. However, the 100% annual allowance rarely applies to cars. The rate of allowance given to a car depends on its CO2 emission, so that the less a car emits the faster the business will benefit from tax relief. A deduction of up to 20% is made from taxable profits each year for capital costs which have not been relieved by the annual investment allowance.

It is possible to deduct certain costs on features which are integral to a building, such as lighting, heating and air conditioning systems. This can apply even to commercial premises which are not new builds. The annual investment allowance can apply to integral features and the balance could receive an allowance of 10% per year. The tax reliefs can be significant and should be considered when planning the premises for your business.

If an asset is sold for more than the capital allowances left to deduct from profits, the surplus could be treated as extra profit for the year. It could be worthwhile considering the timing of disposals of assets which are likely to increase profits.

Where a company makes a loss as a result of investing in certain types of capital, such as green technology and research and development assets, a tax credit may be claimed. This could result in a payment to the business, even before it has paid over any tax.

There are incentives for certain types of investment that the government wishes to promote, such as for converting empty spaces above commercial premises into flats.

Various tax planning opportunities are available with capital allowances. It is possible to obtain allowances separately on assets which are expected to have a life of less than five years. This can accelerate capital allowances. It is also possible to disclaim capital allowances, which can be an advantage where your tax free allowances would be wasted if the capital allowance was all used in the first year.

Discuss with us a budget for capital expenditure, which is aligned to business goals and optimised for tax.