There’s a popular saying that goes like this, “Only two things are certain in life, death and taxes.” Yes, everyone must pay taxes, which may appear burdensome to most people, but if you have knowledge about the way the tax system works, you can easily qualify for substantial tax relief. It could be that you’re operating a business, or you are the owner of a commercial property that qualifies for capital allowance claims. A lot of owners assume that their accountants are going to start working on the claims automatically, but the reality is that, if you’re not efficient about it, you’ll be paying more money that you need to.
There’s a lot that you need to understand about making capital allowance claims, and if you have no idea on how to go about that, this is the place for you to be. We are going to be discussing how you can qualify for the claim, and most importantly, how you should go about making capital allowance claims for yourself. Read more about it here.
Understanding Capital Allowance
To explain it in an easy to understand manner, capital allowance is the sum of money businesses in the UK can claim against their pre-tax income. The allowance is made possible because of the complex and vast Capital Allowances Act 2001, and that is one of the main reasons why experts are required in the accounting field. Any business may claim a capital allowance on the assets it has bought for purposes related to the business.
The business may claim a portion of the asset or the full value, depending on its nature. Depreciation isn’t compatible with capital allowance since it isn’t allowed to be tax-deductible. This means that a business must include the cost of depreciation with the net profit for all purposes related to tax. Businesses will have to pay the full cost of depreciation if capital allowance isn’t claimed or capital expenditure doesn’t meet the requirements.
Capital allowance may be claimed by the business for the following:
- Landscaping
- Patenting
- Research and Development
- Equipment and machinery purchases
- Real estate conversions
- Property Embedded Fixtures & Features (PEFFs)
- Cost of renovation and property improvement
- Capital spent on purchasing commercial properties
Everything mentioned above qualifies as capital expenditure. The business can also buy and sell its product and services to gain revenue expenses. The expense that doesn’t qualify for capital allowance is trading expense. To put it simply, all expenditures that offer permanent benefits to the business can qualify as capital expenditures.
When a business makes a capital allowance claim, they are writing off their expenditures as important business expenditures, and that means a lower taxable income.
What Expenses Make You Eligible for Capital Allowances?
We’ve already discussed above that not all expenditure will qualify for capital allowance. The surprising thing is that a lot of accountants don’t know what type of expenditures can qualify, which is why the business ends up paying higher taxes. To give you a clear idea, here are some of the expenditures that qualify for capital allowance:
- Ownership – The main criterion for qualifying is ownership, as you must own the asset if you want to claim a capital allowance. Assets that are leased don’t manage to qualify for a capital allowance, but you can make a claim for expenditures related to the rental cost.
- Costs of Building – The cost of buying or building property doesn’t qualify for a capital allowance. There are some parts of the building that could still qualify, which include PEFFs (property embedded fixtures and features). Even though there is no way to reduce taxes when you’re building the property, you can still reduce the overall taxes you must pay by claiming allowances on important fixtures and features.
- Capital Allowance for Property – Claims for property capital allowance play a major role when it comes to buying or selling commercial property. You can still qualify for a major claim, but that depends on the nature of the property. You can also take advantage of a special capital allowance for energy efficient and eco-friendly industrial plants and machinery. If you’re buying new equipment, the size of the claim will be impacted by how energy efficient the equipment is.
Capital Allowance Claims That Are Missed
We already discussed that a lot of people have no clue about what qualifies as essential property embedded fixtures and features because of the complex nature of accounting. This complicates matters. It is also a good reason why you may end up paying more taxes that you should for your property.
Every immovable item that is integral to your business operations is known as an integral fixture and feature. They can include the following:
- Sanitary systems
- Kitchen installations
- Heating systems
- Ventilation systems
- Lifts
- Security systems
The list also includes anything that can’t be removed from the premises and is essential for your business operations. All such items will qualify for capital allowances, irrespective of if you installed them on the property after buying it, or if they were purchased with the property.
Most of the assets mentioned above will still be unclaimed if you don’t start the process to help find your capital allowance. Most accountants tend to need the help of an expert that has great surveying capabilities to help find possible claims for capital allowance.
Making a Capital Allowance Claim
Anyone that must pay tax in the UK and has the necessary expenditure or those who have bought a commercial property will qualify for capital allowance. The list includes the likes of partnerships, companies, and sole proprietors. If your company qualifies for capital allowances, you can claim refunds on tax paid, use it for future tax costs like a tax credit, or a mixture of both. That means you will be reducing future taxes significantly by claiming capital allowances
It’s not easy to calculate your capital allowances, which is one reason why you must acquire the services of experts to look at your situation and give recommendations for the best approach for you. There is going to be a lot of time for you to claim tax returns when you make a capital allowance claim. In general, tax returns can be claimed within a year of the deadline for filing for returns.
