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Capital Allowances are one of the oldest types of tax relief out there, having been in existence in the UK in one way or another for over a hundred years. Despite this, Capital Allowances are still a thing of mystery across a number of sectors, including manufacturing. Many companies are still unaware of what qualifies, how much the allowance can be worth and how they need to apply.
Many organisations that own commercial property are not even aware that Capital Allowances can be claimed, and with an average Capital Allowance relief being worth around £48,000 per year, these companies are missing out on what could be a substantial amount of cash.
So considering it’s been around so long, why do many businesses still find Capital Allowances so difficult to get to grips with? The answer, unfortunately, is that applying for the allowance is often an arduous and confusing process. Whilst most accountants will have a basic understanding of Capital Allowances, a large number will lack the detailed knowledge required to ensure clients are claiming everything they are entitled to.
There are a few different types of Capital Allowances which we will explore below.
AIA enables companies to offset the total cost of most plant and machinery items against their profits in the year during which the costs were incurred. It is a particularly valuable form of Capital Allowance.
AIA is applicable for nearly all plant and machinery used in a business such as vans, computers and general office equipment, plus some fixtures. It can also be claimed for the costs of installing and maintaining plant and machinery, as well as money paid out for demolition and removal.
Remember though that AIA cannot be claimed for vehicles such as company cars. Also, items that were originally bought for non-business use, or that were given to a business by a third party, will not be covered by AIA either.
The AIA limit has been temporarily bumped up from £200,000 to £1million between 1st January 2019 and 31st December 2020. The aim of this is to incentivise UK businesses to start investing now rather than hold off on major capital spending due to the current political uncertainty over Brexit in particular. The government regularly alters the annual limit for AIA claims (it has changed multiple times over the last 10 years especially) so companies should check this with HMRC or give us a call if they’re unsure.
As this form of capital allowance is the most lucrative, it’s well worth making sure that everything is properly accounted for. Often items can be missed off as companies don’t realise they qualify. Done accurately, this generally requires a detailed survey of the company’s commercial property and an inventory drawn up by someone with an extensive knowledge of AIA eligibility.
This type of Capital Allowance does not count towards a company’s AIA limit so can be claimed for alongside it. First year allowances will cover certain low CO2 emission cars, water and energy saving equipment, bio-gas, hydrogen and gas refuelling equipment as well as zero emission goods vehicles.
If a company doesn’t claim all the first year allowances it is eligible for, it can claim part of the cost in the next accounting period via writing down allowances.
If a company exceeds the AIA annual limit, or has items that can’t be included in AIA, it may well qualify for writing down allowances. These allow a deduction of an item’s value from their profits each year.
The value that can be deducted varies between different items, with percentages being between 18% and 8%. For cars, the rate that will be applied depends on their CO2 emissions. Again, accurately pooling items to make sure a company can maximise its claim requires in-depth knowledge and experience.
With so many types of allowance pertaining to a broad spectrum of items and accounting periods, it’s not surprising many company executives get confused. Indeed, even accountants often lack the experience and confidence to handle such tax claims.
For manufacturing firms, the most common issue is that accountants may not have time to properly assess a company’s eligible assets or understand the system properly which can lead to under-claiming. Whilst many accountants can help with claims for everyday purchases and expenses such as tables, chairs IT equipment, many may not have the accurate skill set required for manufacturing specifically.
A full survey carried out on-site is only effective when the person undertaking the survey fully understands what HMRC deems as eligible. This requires accurately assessing a commercial property’s cost, as well as placing values on the qualifying plant and machinery inside it, from plumbing to air conditioning. This is where accountants can benefit their clients by working in conjunction with experts in Capital Allowances such as ourselves.
Here at Myriad Associates we have many years’ experience in handling all aspects of R&D Capital Allowances. We will work hard to understand your company and its assets to advise you accurately on what you need to claim for and how.
Simply contact our friendly team on 0207 118 6045 or use our contact page and we’ll be pleased to discuss your requirements and move things forward.