Reduce Your Tax Bill with Capital Allowances

Reduce your tax bill | Exit Planning

Business owners incur thousands of pounds in capital expenditure to ensure that their pub, restaurant, bar or venue is up to standard. Many business owners are unaware that they can make capital allowances claim to reduce their tax bill so I thought I would clarify what capital allowances are and how you can make the most of the benefit.

What are Capital Allowances?

Capital allowances can be a great way for businesses in the hospitality sector to claim relief on their business expenditure. The tax relief allows you to deduct the total cost of assets purchased (subject to the limits below) from accounting profits, enabling you to make a saving on your corporation tax bill. Yet, many businesses are missing out on the relief as they are unsure of the expenses that can be claimed. According to HMRC, depending on the allowance used, claims can be made on:

  • Assets
  • Integral features
  • Fixtures
  • Alterations and refurbishment or any expenses that may go towards the building of the property.

In some circumstances, allowances may be stretched to items which impact the ambience and atmosphere if it has a significant contribution on the business. Although a capital allowance can be applied to most expenses that relate to the business, there are several items exempt. Claims cannot be made on:

  • Leased items
  • Building
  • Land and structure
  • Entertainment purposes

Types of Capital Allowances

There are three types of capital allowances which hospitality sector businesses can benefit from:

  • Annual Investment Allowance
  • First Year Allowance
  • Writing Down Allowance

Annual Investment Allowance

The AIA allows you to deduct 100% of the cost of the asset from profits before tax. With most assets that businesses buy falling under this category, the AIA is one of the most common capital allowances available. Businesses can claim up to the value of £200,000 for qualifying investments made on or after 16 January 2016. VAT registered businesses can also claim the total allowance minus the VAT reclaimed on the asset.  The AIA cannot be claimed on the following:

  • Vehicles
  • Assets used or possessed from a previous business
  • Personal assets
  • Gifted or free assets

Further information on the AIA can be found here. So what if my capital expenditure does not qualify under the AIA? There are two further capital allowances that can be used.

First Year Allowances

For new assets, 100% of the value of the asset can be deducted from profits before tax. This can be claimed in addition to AIA and this is not tapered down from the AIA limit. First Year Allowances (FYA’s) can only be claimed on:

  • Some cars with low emissions
  • Environmentally friendly equipment
  • Energy saving equipment

Writing Down Allowances

For assets which are already owned, have been used in a previous business or were gifted. Writing Down Allowances are divided into three ‘pools’ where a relief of 18% or 8% is applied depending on the asset and pool they fall under.

For hospitality businesses, WDAs can allow you to save on most capital expenditure that cannot be claimed through AIA or through the FYA. It is important to note that AIA must be claimed first. Further information on the pooling system can be found at Gov.uk.

If you believe you are underutilising your allowances or would like more information on the relief, contact me directly at Adam.Moody@raffingers.co.uk

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