If you're in business you can claim tax allowances, also known as capital allowances, on certain purchases or investments that you make on business assets. You cannot directly deduct your expenditure on those assets when calculating your profits or losses, instead you can deduct a capital allowance. This applies whether you're self-employed and pay Income Tax or are a company or organisation that's liable for Corporation Tax.
Many common business assets such as office equipment, furniture and machines or tools, are considered to be plant and machinery for capital allowance purposes, and expenditure on them could qualify for plant and machinery allowances.
This guide explains which types of assets count as plant and machinery for capital allowance purposes, what capital allowances are available for them, and how to calculate and claim them.
This guide does not cover plant and machinery allowances relating to fixtures in buildings or structures, including certain integral features in buildings. For more information, see the guide 'Capital allowances relating to building and renovation'.
On this page:
Tools, machinery, vehicles and other equipment you buy for your business will generally qualify for plant and machinery allowances.
Some common examples include:
However, different assets may be eligible for different plant and machinery allowances. For more information, see the page in this guide on types of plant and machinery allowances.
There are also certain fixtures in buildings, and integral features in buildings, that qualify for plant and machinery allowances.
Capital allowances relating to buildings and renovation
Find out more about what qualifies as plant and machinery
To qualify for plant and machinery allowances, all the following must apply:
In most cases, you cannot claim capital allowances for assets you lease from someone else. You may be able to claim certain capital allowances for assets that you own and lease out to other users as part of your business, but only in very particular circumstances.
If you partly use an asset for non-business use, for example, for private use - you can still claim capital allowances on the business use of the asset. The allowances you claim must be reduced by the amount arising out of your non-business use so that only the business use proportion is taken into account.
Plant and machinery allowances: long funding lease
Plant and machinery allowances on fixtures
There are a number of allowances available for expenditure on plant and machinery. The term 'accounting period' is used throughout this guide, but you will see the term 'chargeable period' used in the HM Revenue & Customs (HMRC) Capital Allowances Manual.
Most businesses can claim an annual investment allowance for expenditure of up to £100,000 a year on most plant and machinery, apart from cars. In many cases (depending on your level of expenditure) this may mean that you can claim your entire expenditure on qualifying items against this allowance. A reduction in the annual investment allowance to £25,000 a year from 1 April 2012 for Corporation Tax, and from 6 April 2012 for Income Tax has been announced, subject to legislation.
Annual investment allowance only applies for expenditure incurred on or after 1 April 2008 for Corporation Tax or 6 April 2008 for Income Tax. There is more information in this guide on annual investment allowances.
Currently, there are 100 per cent first-year allowances available for expenditure on certain specific types of asset. This means you can claim the full expenditure on these assets as a deduction when calculating your taxable profit or loss for the accounting period when you spent the money, if all the conditions are met. The key types of assets that qualify for first-year allowances are:
There is more information in the sections below on first-year allowances.
For new expenditure incurred in the 12-month period starting on or after 1 April 2009 for Corporation Tax or 6 April 2009 for Income Tax, your business can claim a temporary first-year allowance of 40 per cent. You can claim this on any assets that would otherwise go into your main 'writing-down allowance' pool - in practice this means you would normally claim it on the residual amount of any expenditure left after claiming the annual investment allowance.
You cannot claim the temporary first-year allowance on cars, assets that you are going to lease out or special rate expenditure, for example long-life assets or expenditure on integral features.
There is further information in the sections below on writing-down allowances and 'pools', and first-year allowance.
Writing-down allowances are annual allowances that reduce, or 'write down' any balance of capital expenditure on plant and machinery that you haven't been able to claim either the annual investment allowance or a first-year allowance for, and on residual balances of expenditure that you have carried forward from the previous accounting period.
There are two rates of writing-down allowances for plant and machinery. To calculate them, you first group your expenditure into different pools:
Writing-down allowances for expenditure on short-life assets, or assets that you have used partly for non-business purposes, are calculated individually. That expenditure is therefore added into a separate pool for each asset, known as a single asset pool. A business may have several single asset pools. The rate of writing-down allowance to apply to each pool will depend on the type of asset on which the expenditure was incurred. Follow the link below for more information about writing-down allowances.
If in either the main or special rate pool the remaining balance is £1,000 or less after you have carried out the steps below, then instead of claiming a percentage writing-down allowance you can claim an allowance, sometimes called the Small Pools Allowance, for the whole amount remaining in that pool.
Steps to work out if you can claim the Small Pools Allowance for a given pool:
The main or special rate pool will continue to exist, but the balance carried forward to the next year will be nil. Follow the links below for more information about Small Pools Allowance.
Small Pools Allowance - for residual balances of £1,000 or less
For certain expenditure made after July 1997 and before 6 April 2008 for Income Tax or after July 1997 and before 1 April 2008 for Corporation Tax:
Plant and machinery allowance: first-year allowance
Businesses can claim an annual investment allowance for capital expenditure incurred on most items of plant and machinery.
The annual investment allowance was introduced for expenditure incurred on or after 1 April 2008 for Corporation Tax or 6 April 2008 for Income Tax.
Any new expenditure on plant and machinery assets bought after 1 April 2008 for Corporation Tax, or 6 April 2008 for Income Tax qualifies for annual investment allowance, apart from these exceptions:
Qualifying expenditure: Annual investment allowance
The amount you can claim depends on when you incurred the expenditure as shown in the table below. However, please read this in conjunction with the section below entitled 'calculating the annual investment allowance'.
In most cases, for accounting periods starting on or after 1/6 April 2010 and ending on or before 31 March/5 April 2012 if you have spent £100,000 or less in total on qualifying assets, you can claim an annual investment allowance for the whole amount. However, this is subject to certain restrictions. Also, although the reduction of the annual investment allowance to £25,000 will take effect from 1/6 April 2012 the annual investment allowance that can be claimed for any accounting period that spans the date of the decrease will be calculated under transitional rules and so may be less than £100,000.
If the annual investment allowance changed during your accounting period
| For 1/6 April 2008 to 31 March/5 April 2010 | From 1/6 April 2010 | Planned limit from 1/6 April 2012 | |
|---|---|---|---|
| Annual Investment Allowance | £50,000 | £100,000 | £25,000 |
If the total you have spent in the period is more than the appropriate limit, you can claim up to the limit as annual investment allowance and may be able to claim another allowance for the remaining balance.
Example: You are self-employed and preparing your Self Assessment tax return for the accounting period 6 April 2009 to 5 April 2010. You spent £43,000 on 30 June 2009 on office furniture and printing machinery for your business. You can claim the entire sum of £43,000 as an annual investment allowance. However, if you had spent £55,000 you could have claimed £50,000 annual investment allowance and the temporary 40 per cent first-year allowance on the remaining £5,000, because the expenditure occurred in the 12-month period starting 1/6 April 2009. To find out more about the 40 per cent first-year allowance read the section below on first-year allowance.
If your accounting period spans the date of a change in the annual investment allowance amount on 1/6 April 2010 or 1/6 April 2012 there are special rules to calculate the maximum amount you can claim.
If the annual investment allowance changed during your accounting period
There are also separate rules for calculating how much allowance you can claim if your accounting period was more or less than 12 months.
Calculating allowances for accounting periods shorter or longer than 12 months
If your business is in a group or has related companies under common control and is liable to Corporation Tax, then only one annual investment allowance is available for the group or the related companies.
If you pay Income Tax and you or your partnership carries on two or more businesses that are related, then only one annual investment allowance is available for all the related businesses.
If an item is used partly for non-business use, you must reduce the amount you claim to reflect the expected non-business use.
You cannot claim the annual investment allowance for any expenditure on plant and machinery during the accounting period in which you stopped trading, or in which your company or organisation closed down.
Find out more about Qualifying expenditure as a group or related companies
Find out more about what counts as related businesses
CA23080 - PMA: Qualifying expenditure: Annual Investment Allowance qualifying expenditure: contents
First-year allowances, some of which are also known as 'enhanced capital allowances', are currently available to businesses on the expenditure on certain items such as energy-saving and water-efficient equipment, cars with very low carbon dioxide emissions and goods vehicles with zero carbon emissions. These allowances enable you to make a claim for up to 100 per cent of the cost of the item against your business profits in the year of purchase. There's more information on cars in this guide.
If you have incurred expenditure that you can claim a 100 per cent first-year allowance against, then that expenditure has been 'fully relieved', and you will not be able to claim any other allowance on it.
A temporary 40 per cent first-year allowance was also available for expenditure in the year from 1 April 2009 for Corporation Tax, or from 6 April 2009 for Income Tax.
First-year allowances: the basics
For any qualifying expenditure incurred in the 12-month period starting on 1 or 6 April 2009 only, your business can claim a temporary first-year allowance of 40 per cent on any assets that would otherwise go into your main pool, with a writing-down allowance of 20 per cent currently, but excluding the exceptions listed below.
This means you can claim the temporary first-year allowance for any qualifying expenditure incurred during the 12-month period starting 1 or 6 April 2009 over £50,000 that you could not claim the annual investment allowance for.
However, you cannot claim this temporary allowance for:
Capital allowances relating to buildings and renovation
You can claim 40 per cent of your qualifying expenditure incurred in the period from 1 April 2009 to 31 March 2010 for Corporation Tax, 6 April 2009 to 5 April 2010 for Income Tax, and there is no upper limit. However, if you are self-employed or in a partnership and an item is used partly for non-business use, you must apportion the amount you claim accordingly.
Example: your accounts cover a 12-month period ending before 1 or 6 April 2010 and in the 12-month period started 1 or 6 April 2009, you spent £60,000 on furniture and machinery for your business. You can claim £50,000 as an annual investment allowance, leaving a balance of £10,000. You can claim a temporary 40 per cent first-year allowance of £4,000 on this balance, leaving £6,000 expenditure to carry forward to the next accounting period.
Writing-down allowances (WDA) are annual allowances that you can claim to reduce or 'write down' any remaining balance of capital expenditure on plant and machinery that you have not already claimed a capital allowance for, referred to as a 'pool' of 'unrelieved' expenditure.
You apply WDA to the sum of the following:
There are two rates of WDA for plant and machinery, the rate for the main pool, currently 20 per cent, and the rate for the special rate pool, currently 10 per cent.
New rules were introduced following Budget 2011 to reduce the rate of WDA on both the main rate pool of plant and machinery expenditure (from 20 per cent to 18 per cent) and on the special rate pool of plant and machinery expenditure (from 10 per cent to 8 per cent).
The change will apply to the calculation of capital allowances for accounting periods:
Because the rate changes have effect from a fixed date, those businesses with an accounting period that spans the date of the change will have a hybrid rate for the whole of that transitional period. If your accounting period spans a date when the rate changes, see the pages in this guide on calculating writing-down allowances if your accounting period spans a rate change.
With the exception of short-life or part-private use assets, see below for more information, you can allocate unrelieved expenditure on your assets into two pools for the purposes of calculating your writing-down allowances.
| Asset pool | WDA before 1/6 April 2008 | WDA from 1/6 April 2008 | WDA from 1/6 April 2012 |
|---|---|---|---|
| special rate pool | The special rate pool was only introduced on 1/6 April 2008, so there was no rate applicable to it before that date. However, expenditure on long-life assets (now a type of 'special rate' expenditure) incurred before 1/6 April 2008 qualified at 6%. | 10% | 8% |
| main pool | 25% | 20% | 18% |
As the table above shows, the writing-down allowance rates changed from 1 April 2008 and again from 1 April 2012 for Corporation Tax and from 6 April for Income Tax. If your accounting period spans a date when the rate changes, follow the link below on calculating writing-down allowances if your accounting period spans a rate change and calculating allowances for accounting periods shorter or longer than 12 months.
Calculating writing-down allowances if your accounting period spans a rate change
Residual expenditure that goes into the special rate pool includes qualifying capital expenditure on:
Residual expenditure on everything else goes into the main pool, unless you make a short-life asset election or it is an asset with non-business use, in which case it goes into a single asset pool (see below). Note that the writing-down allowance that you claim is a percentage of the residual balance in a pool and not a percentage of the original amount of expenditure on an asset.
Once you have claimed the writing-down allowance on a pool, you reduce or write down the residual balance in that pool by the amount of your writing-down allowance claim and carry the new lower figure forward to the next accounting period.
Example 1: If you are self-employed, pay Income Tax and spent £56,000 in the 2009-10 tax year on office furniture and machinery, you could have claimed the annual investment allowance of £50,000 and the temporary 40 per cent first-year allowance on the remaining £6,000 - £2,400. If you carried forward the balance of £3,600 into the next accounting period, you could then claim a 20 per cent writing-down allowance against this £3,600 - £720 - leaving £2,880 to carry forward to the period after that.
Example 2: If you are self-employed and preparing accounts for the period 6 April 2010 to 5 April 2011 and you spend £110,000 on new electrical and heating systems for your shop, you can claim £100,000 as an annual investment allowance, leaving a balance of £10,000. The £10,000 can be allocated to the special rate pool and you can claim a writing-down allowance of 10 per cent of this figure, or £1,000, leaving a balance of £9,000 to be carried forward to the next accounting period.
Example 3: Where relevant, you can choose to allocate expenditure to the most advantageous allowances that are available. You are self-employed, preparing accounts for the period 6 April 2010 to 5 April 2011, and in that period you spend £60,000 on new electrical and heating systems for your business and £70,000 on general equipment and a new van. You can allocate your £100,000 annual investment allowance first to the £60,000 spent on integral features, since these would otherwise only attract the 10 per cent writing-down allowance. This leaves an annual investment allowance of £40,000 that you can allocate to your £70,000 general equipment expenditure leaving a balance of expenditure of £30,000. Finally, you can allocate the £30,000 expenditure to the main pool and claim a writing-down allowance of 20 per cent of £30,000 - £6,000 - leaving £24,000 to be carried forward to the next accounting period.
If in either the main or special rate pool the remaining balance is £1,000 or less after you have carried out the steps below, then instead of claiming a writing-down allowance you can claim an allowance, sometimes called the Small Pools Allowance, for the whole amount remaining in that pool.
Steps to work out if you can claim the Small Pools Allowance for a given pool:
The main or special rate pool will continue to exist, but the balance carried forward to the next year will be nil. For more information, see the section below on the Small Pools Allowance.
You do not add expenditure on assets that are used partly for non-business into either the main or special rate pools. Instead, to enable you to work out the allowances that you can claim for your business use, you calculate writing-down allowance for each asset individually in a single asset pool:
Remember that the amount of writing-down allowance will be reduced in proportion to your business use.
You do not add the expenditure on assets that you have elected to treat as short-life assets into the main or special rate pools mentioned above. Instead, you need to calculate the writing-down allowance for each short-life asset individually in a single asset pool, using the writing-down rate for the main pool, currently 20 per cent (18 per cent 1/6 April 2012), because you cannot make a short-life asset election for special rate expenditure. For further guidance, follow the link below on short-life assets and capital allowances.
Short-life assets and capital allowances
Find out more about the rules for writing-down allowances
The writing-down allowance for small pools, sometimes referred to as the 'small pools allowance', allows you to write off either the main or special rate pool or both of them if the balance in that pool is £1,000 or less. It applies to the total in either pool of:
If the sum of the expenditure brought forward plus any new expenditure less any disposal proceeds in a pool exceeds £1,000, then you cannot claim the writing-down allowance for small pools for that pool. You can claim a small pools allowance for either or both the main pool and the special rate pool if either or both meet the conditions.
Note that the allowance of £1,000 must be adjusted proportionately for accounting periods longer or shorter than 12 months. Follow the links below for more information on calculating allowances for accounting periods shorter or longer than 12 months and for pools and writing-down allowances.
Calculating allowances for accounting periods shorter or longer than 12 months
Pools and writing-down allowances
The writing-down allowance for small pools applies to accounting periods that began on or after 1 or 6 April 2008.
If the total, as calculated above, in either the main or special rate pool is £1,000 or less, you can claim a small pools allowance up to or equal to that total.
Example 1: If you pay Income Tax and you spent £50,500 on furniture and machinery during the 2009-10 tax year, and have no balance carried forward from the previous accounting period and made no disposals in the period, you can claim the full £50,000 annual investment allowance. The balance of £500 can be then added to the main pool. Because the unrelieved expenditure of £500 is less than £1,000 and you have no brought-forward main pool, you can claim the remaining £500 as the writing-down allowance for small pools, leaving the main pool carried forward with a nil balance.
Example 2: You spent £1,500 on furniture in May 2011 and also brought forward a main pool of £700 from the previous year. There were no other additions or disposals. You can claim an annual investment allowance for the full £1,500 and a writing-down allowance for small pools for the £700 pool brought forward. The balance of the main pool to carry forward to the next accounting period is nil.
Note that the writing-down allowance for small pools is not available for short-life or part non-business use assets.
Find out more about claiming the writing-down allowance for small pools
The rules for claiming capital allowances on cars changed for cars that were purchased on or after 1 April 2009 for Corporation Tax purposes and on or after 6 April 2009 for Income Tax purposes.
Since 17 April 2002 certain very low CO2 emission cars, including electrically propelled cars, qualify for a 100 per cent first-year allowance.
For capital allowance purposes, a car is any mechanically propelled road vehicle unless it is:
This means that vans and lorries are not considered to be cars, whereas motor homes are. However, certain vehicles such as driving school vehicles with dual control are not treated as cars for capital allowance purposes although they may be classed as cars for other tax rules. For purchases on or after 1/6 April 2009 motorcycles are not cars for capital allowance purposes, though they were before that date.
If a vehicle is not a car, the special rules for cars do not apply to it and the other allowances in this guide may be available.
Please note that this definition of a car for capital allowances may not be the same as that used for other aspects of your Income Tax or Corporation Tax, or for other taxes such as VAT, or by other government departments.
The capital allowances you can claim on your cars are based on CO2 emissions, which are shown on the car's V5 certificate.
Check your car's CO2 emissions on the Vehicle Certification Agency (VCA) website (Opens new window)
If your car does not have an emissions figure because it was first registered before 1 March 2001 then the expenditure is allocated to the main pool, or a single asset pool if there is non-business use, see below.
If your car does not have an emissions figure but it was first registered after 1 March 2001 then the expenditure is allocated to the special rate pool, or a single asset pool if there is non-business use, see below.
| CO2 emissions | Capital allowances treatment of expenditure |
|---|---|
| Over 160 grams per kilometre (g/km) | Goes into the special rate pool and qualifies for writing-down allowances at the rate for the special rate pool, currently 10 per cent per annum. |
| 160g/km or less but more than 110g/km | Goes into the main pool and qualifies for writing-down allowances at the rate for the main pool, currently 20 per cent. |
| 110g/km or less (but note that the first-year allowance for cars in this category is due to expire in 2013) | You can claim up to 100 per cent allowance in the accounting period when they were bought, the balance (which may be nil) goes into the main pool in the next year. For detailed guidance, see the guide First-year allowances: the basics |
Example: If you are self-employed, you pay Income Tax and your accounts are drawn up for the year to 5 April 2010 and you spent £20,000 on a car that you use 100 per cent for your business that has CO2 emissions of 165g/km, the calculation is as follows:
Cost of car = £20,000
Writing-down allowance deducted (£20,000 x 10 per cent) = £2,000
Value to carry forward = £18,000
Capital allowance you can claim = £2,000
Note that there are special rules for cars that are not used wholly for business purposes, for example, for private use. To check the details see the section below 'If you or an employee use the car partly for non-business use'.
| Original cost | Capital allowances treatment of expenditure |
|---|---|
| Up to £12,000 with 100 per cent business use | The cost or value was added to the main pool and qualified for writing-down allowances at the rate for the main pool, currently 20 per cent. |
| Up to £12,000 with non-business use | The cost or value was added to a single asset pool (one for each mixed-use car) and qualified for writing-down allowances at the rate for the main pool and the allowance was then restricted to reflect non-business use. |
| More than £12,000 | The cost or value was added to a single asset pool (one for each car) and qualified for writing-down allowances at the rate for the main pool, currently 20 per cent. The allowance was then restricted to a maximum of £3,000 per year and was further restricted to reflect any non-business use. |
The above rules in relation to expenditure on expensive cars in single asset pools continue for a transitional period of five years ending on the last day of the first accounting period to end on or after 5 April 2014. After this date, the balance is moved into the main pool unless the car was used for non-business purposes. For more information, follow the link below on writing-down allowances.
Example: If you are self-employed, pay Income Tax, your accounts are drawn up for a full year to 5 April 2009 and you spend £16,000 in that year on a car, then the calculation is as follows:
Cost of car = £16,000
Writing-down allowance (£16,000 x 20 per cent) = £3,200 but
restricted to £3,000
Writing-down allowance you can claim in the year = £3,000
Balance to carry forward = £13,000 (£16,000 - £3,000)
There are special rules for items that are not used wholly for business purposes - for example, for private use. These rules, summarised below, apply to expenditure on cars incurred both before and after 1/6 April 2009.
If you are a self-employed individual or partner in a partnership, pay Income Tax and use one or more cars yourself partly for non-business purposes, you will have to work out the capital allowances for each car separately. You do so by adding the expenditure for each car to a single asset pool and calculating the maximum allowance available for that expenditure. You must then reduce your claim by the amount of your non-business use so that only the business use proportion is taken into account.
If your business provides cars to employees and they use them for private purposes, the cars are treated as being for 100 per cent business use. However, the expenses and benefits tax rules for cars provided to employees will apply. Follow the link below for more information on expenses and benefits for employers.
Expenses and benefits at the end of the tax year
For any asset that you intend to keep for no more than four years after the end of the accounting period in which you bought it, or that you expect will wear out or break within that period, you can make an election for it to be treated individually for capital allowance purposes as a 'short-life asset'. This type of asset qualifies for the annual investment allowance (AIA), so you would normally only make a short-life election if your AIA is used up.
Legislation was introduced after Budget 2011 to increase the period over which expenditure on plant or machinery can be given 'short life asset' treatment from the current four years to eight years.
This change will have effect for expenditure on plant and/or machinery incurred:
You must inform HMRC in writing of your decision to treat something as a short-life asset, known as an 'election'. However, certain assets cannot be the subject of an election.
If you are a sole trader or partnership that pays Income Tax, your election should be made no later than the first anniversary of 31 January following the end of the tax year in which you acquired the item. For example, if you bought a computer in the accounting period ending 31 July 2009, you must make the election by 31 January 2012. You cannot withdraw an election once it has been made.
If your company pays Corporation Tax, different rules apply.
Where small items of the same type are in a group, for example, crockery - it is acceptable to nominate the group of items as the short-life asset.
Claims and elections for Corporation tax
What qualifies as a short life asset
Because you treat each item individually, you do not group them into the main pool used for other assets when working out writing-down allowances. You create a short-life asset pool and apply the rate for the main pool, currently 20 per cent, to that pool for a maximum of five accounting periods. (The rate of writing down allowance of the main pool is reduced from 20 per cent to 18 per cent for accounting periods ending on or after 1 April 2012 (for Corporation Tax) and 6 April 2012 (for Income Tax).)
If you sell or dispose of a short-life asset either four years or eight years, depending on when you bought it and which time limit applies, of the end of the accounting period when you acquired it, what you do depends on how much you sell it for or on its market value if you dispose of it, for example, throw it away or give it away.
If you sell it for less than the written down value in the short-life asset pool, or you give it away and the market value is less than the written down value in the short-life asset pool, then you can adjust your capital allowances by claiming a balancing allowance for the difference. This has the effect of reducing your tax liability. For more information, follow the link below on calculating and claiming plant and machinery allowances.
Calculating and claiming plant and machinery allowances
If you sell it for more than the written down value in the short-life asset pool, or you give it away and the market value is now more than that value, you will need to show a balancing charge in your tax return. A balancing charge has the effect of increasing your tax liability when you come to work out your profits. For a detailed explanation, follow the link above on calculating and claiming plant and machinery allowances. The only exceptions are if you give the asset to a charity or Community Amateur Sports Club (CASC), or gift it to an employee in circumstances such that there is a charge to tax under ITEPA (the Income Tax (Earnings and Pensions) Act) 2003. In these cases, the disposal value is treated as nil for capital allowance purposes.
For more information, see the section below on selling, gifting or disposing of pooled assets.
If you are still using the asset at the end of either the four or eight years after the accounting period in which you acquired it you should transfer the residual carried-forward value into your main pool in your next accounting period.
The rules for short-life assets
The rules below apply only to assets that you initially claimed capital allowances for.
If you sell or otherwise dispose of a pooled asset, you have to deduct the disposal value from any remaining balance in the relevant pool (main or special rate) in which the expenditure on it was included. Remember if you claimed a 100 per cent first-year allowance, or the full cost of an asset by annual investment allowance, the asset is still deemed to have been taken to the appropriate pool, although the value remaining in the pool after your claim to the 100 per cent allowance would be nil.
If the disposal value of the item is less than the remaining value in that pool, then you simply reduce the value of the appropriate pool, unless you dispose of assets in the accounting period when the business ceases, see below for more information.
If the disposal value is more than the value of the pool, this results in a 'balancing charge' equal to the difference. The main and special rate pool may have a balance carried forward of nil due to annual investment allowance being claimed in previous years.
The disposal value is usually:
But if the sale proceeds or market value is more than the original cost of the asset, you will normally limit the disposal value to that original cost. However, if you acquired the asset from a connected person, see below, and it originally cost them more than they sold it to you for, you limit the disposal value to what it cost them, not what they sold it to you for. Therefore, whether you sell the item or give it away, the balancing charge can still apply.
See below for examples. For more on selling and disposing of assets follow the link below on ceasing your business and capital allowances.
Ceasing your business and capital allowances
A connected individual is a close relative, a spouse or civil partner, or someone related to you by marriage or civil partnership. A company is connected with another if, for instance, the two companies are controlled by the same person or by connected individuals or if one company controls the other.
Definitions: connected persons
If you give a used piece of equipment to a charity or CASC, the disposal value may be nil in certain circumstances.
Capital allowances and gifts to charity
You are self-employed, pay Income Tax and have a main pool of £10,000 from the previous year to be brought in for 2008-09 and you sell a lathe for £11,000. You then prepare your accounts for the tax year 2008-09 where your capital allowance calculation is as follows:
Main pool brought forward = £10,000
Minus disposal proceeds = £11,000
Balancing charge to enter on tax return = £1,000
Main pool value carried forward = £0
This means you cannot claim any writing-down allowances for 2008-09 since there is nothing left in the pool. You will also have to add that balancing charge of £1,000 to your trading profits when calculating the profit figure to enter on your tax return.
If you gave the lathe away, other than to a charity/CASC or employee where there was a charge to tax under ITEPA 2003, then you must use its market value. Therefore, your capital allowance calculation would be:
Main rate pool brought forward = £10,000
Minus market value = £11,000
Balancing charge = £1,000
Main rate pool value carried forward = £0
Disposal example - no balancing charge: You have a main pool brought forward of £5,500 for 2009-10 and during that year you sell a van for £4,000, your capital allowance calculation for 2009-10 is:
Main pool balance brought forward = £5,500
Minus disposal proceeds = £4,000
Main pool value balance = £1,500
This means you can now calculate writing-down allowance for 2009-10
on the remaining pool value of £1,500.
The writing-down allowance would be £300
So main pool value carried forward = £1,200
Disposal example - qualifying gift to charity: You have a main pool brought forward of £10,000 for 2008-09 and you gave away a lathe worth £11,000 to an educational charity that teaches woodwork. Your capital allowance calculation for 2008-09 is:
Main rate pool brought forward = £10,000
If you met the conditions for donations to charity, the gift has no effect on the pool value, and does not give rise to a balancing charge. This means you can claim writing-down allowance on the pool value of £10,000 as normal.
Disposal example - balance brought forward nil: You have a main pool brought forward of nil for 2008-09 and during that year you buy a van for £12,000 and claim annual investment allowance on the whole amount. The following year you sell the van for £8,000. Your capital allowance calculation for 2009-10 is:
Main rate pool brought forward = £0
Disposal value = £8,000
Balancing charge = £8,000
Main rate pool balance carried forward = £0
This page deals with ceasing a business if you are self-employed or a partner. If your company or organisation is liable for Corporation Tax and you cease it and sell its assets see our guide below for more information.
Selling or closing your company and Corporation tax
If you are a self-employed person or partner in a partnership and pay Income Tax on your business profits and your business ceases for any reason, you can still claim capital allowances. If you:
You have to follow these rules even if you originally claimed one of the 100 per cent allowances for the asset in question.
If these disposal values are more than the remaining value of the pool or short-life asset, you have to calculate the difference and add this amount to your profits. This adjustment is known as a balancing charge and has the effect of increasing your profits liable to tax.
Example 1: you have been in business for many years and draw up your accounts to 5 April each year. At 5 April 2009, the value in the pool is £10,000. You then stop trading on 1 July 2009 and sell all the assets in your pool for £17,000. Your capital allowance calculation for 2009-10 is:
Disposal value = £17,000
Minus pool value brought forward = £10,000
Balancing charge of = £7,000
If the disposal values are less than the value of the pool/short-life asset pool, you can claim the value remaining as a balancing allowance. This adjustment has the effect of reducing your tax liability.
Example 2: you have been in business for many years and draw up your accounts to 5 April each year. At 5 April 2009, the value in the pool is £10,000. You then stop trading on 1 July 2009 and keep a word processor with a market value at 1 July 2009 of £2,000. You then sell the other business assets for £7,000. Therefore, your capital allowance calculation for 2009-10 is:
Pool value brought forward = £10,000
Minus disposal proceeds (£7,000 + £2,000) = £9,000
Balancing allowance = £1,000
If you sell any items that were included in a capital allowance pool for more than you originally paid for them, or their value if you keep them personally is more than you paid for them, you should deduct only the amount you originally paid for those items from the pool, and not the actual sale proceeds or value.
If you originally acquired the item that you are selling or disposing of from a connected person and the sale proceeds or market value are more than it cost you (value A) and also more than it cost them when they bought it (value B), then the amount you should deduct from the pool is whichever cost is the greater of A and B. If however the sales proceeds are greater than A but less than B then the value you use is whichever is the greater of the sales proceeds or market value, and B.
Example 1: if the asset cost the connected person £10,000 (B) and he or she sold it to you for £5,000 (A) and the sales proceeds are £6,000 then the sale proceeds are more than A but less than B. So, you would use the sales proceeds - that is £6,000 as the disposal value.
Example 2: if the asset cost the connected person £10,000 (B) and he or she sold it to you for £5,000 (A) and the sales proceeds are £12,000 then the sale proceeds are more than both A and B. So, you would use B - that is £10,000 as the disposal value.
A connected individual is a close relative, a spouse or civil partner, or someone related to you by marriage or civil partnership. A company is connected with another if, for instance, the two companies are controlled by the same person, or by connected individuals or if one company controls the other.
Definitions: connected persons
If your accounting period is shorter or longer than 12 months, there are rules for calculating the amount of capital allowances you are entitled to claim. Please note that the term 'accounting period' is used throughout this guide, but you will see the term 'chargeable period' used in the HMRC capital allowances Manual.
If your accounting period is less than 12 months then the amount of allowance you can claim is reduced accordingly.
This does not apply to the temporary 40 per cent allowance for qualifying expenditure incurred in the 12-month period starting 1/6 April 2009 or the 100 per cent first-year allowances (including enhanced capital allowances). In these cases, you can claim the full 40 or 100 per cent for expenditure that that was incurred in a qualifying period or on a qualifying date.
If you pay Income Tax and your accounting period is more than 12 months but less than 18 months, then the amount of allowance that you can claim is adjusted accordingly.
If your company pays Corporation Tax, the accounting period can never be more than 12 months.
If you pay Income Tax and your accounting period is longer than 18 months, you must split it into shorter periods and make separate capital allowance calculations for each of them.
The first 12 months will form a period and each subsequent 12-month period, or period of less than 12 months, will form further periods. For example, if the period of account is the 20 months from 1 January 2008 to 31 August 2009, you should split it into 12 months to 31 December 2008 and 8 months to 31 August 2009 and apply the rules above.
If your accounting period spans the date when an allowance changed, there are special ways in which you calculate how much allowance you can claim. See the pages in this guide: if the annual investment allowance changed during your accounting period and calculating writing-down allowances if your accounting period spans a rate change.
If your accounting period spans the dates when the annual investment allowance (AIA) changed, there are special, transitional rules for calculating how much allowance you can claim.
Where an accounting period spans 1/6 April 2010, the maximum allowance is the sum of:
However, only a maximum of £50,000 AIA can be claimed in respect of expenditure in that part of the accounting period that falls before 1/6 April 2010.
Example: a company that pays Corporation Tax calculates its AIA for an accounting period 1 January 2010 to 31 December 2010 as follows:
The total AIA is £87,500, but the maximum AIA available for expenditure in the first three months of the year is £50,000.
The AIA applies only to expenditure on or after 6 April 2008 for Income Tax, or 1 April 2008 for Corporation Tax. Where your accounting period started before this date, your AIA will be proportionately reduced.
Where a business has an accounting period that spans 1/6 April 2012 - the date of the decrease from £100,000 to £25,000 - the maximum allowance for that business's transitional period is made up of two parts:
Example: a business with a calendar year accounting period from 1 January 2012 to 31 December 2012 would calculate its maximum AIA entitlement based on:
The business' maximum AIA for this transitional accounting period would therefore be the total of (a) + (b) = £25,000 + £18,750 = £43,750.
However, for the part period falling on or after 1 April 2012 even if the company spent more than £18,750 no more than £18,750 of the business' actual expenditure in that part period would be covered by its AIA entitlement.
If your accounting period spans one of the dates when the writing-down allowance (WDA) changed, there are special, transitional rules for calculating how much allowance you can claim.
The rate of WDA for business expenditure on plant and machinery changed from the 6 April 2008 for Income Tax, 1 April 2008 for Corporation Tax:
Therefore, for accounting periods that started before 6 April 2008 for Income Tax, before 1 April 2008 for Corporation Tax and ended in or after 6 April 2008 for Income Tax, 1 April 2008 for Corporation Tax, a hybrid rate of WDA applies.
If your business' accounting period spans the date for the change of rate of WDA (1 April 2012 (Corporation Tax) or 6 April 2012 (Income Tax)), a hybrid rate is used to calculate the rate of WDA for that transitional period.
The hybrid rate for the main plant and machinery pool is arrived at by calculating the proportion (in days) of the chargeable period falling before the change date, and the proportion (in days) falling after it, calculating the rate for each portion at the 20 per cent and 18 per cent rates respectively, and then adding the two percentages together.
The hybrid rate for the special rate pool is calculated in the same way, but by applying the 10 per cent and 8 per cent rates to the portion of the period before and after the change date respectively, and once again, by then adding those two percentages together.
Example
A company with a calendar year accounting period from 1 January 2012 to 31 December 2012 (a leap year) would calculate its hybrid rate for WDA entitlement based on:
The hybrid main rate WDA for this transitional accounting period would therefore be the total of (a) + (b) = 18.49 per cent.
The calculation of the hybrid rate for the special rate of WDA would be as follows:
The hybrid special rate for this transitional period is the total of (a) + (b) = 8.5 per cent.
To calculate your capital allowances, you should follow the key steps set out below. Please refer to the other pages in this guide for more information on each type of allowance. You'll also find links at the end of the page to guidance on completing your Company or Self Assessment tax return.
You can claim your plant and machinery allowances through your Self-Assessment Income Tax return or Corporation Tax return.
The Company Tax Return: the basics
When you calculate the profit or loss figure for your tax return, you should:
If you pay Corporation Tax, this calculation forms part of your tax computation. If you pay Income Tax, there are spaces on the form where you include the specific capital allowances you are claiming.
To calculate your plant and machinery allowances, you will have to start with the cost of the asset or assets you bought.
The amount of allowance you can claim is based on how much the item cost you, including any costs directly related to the acquisition, but not interest or finance costs, and installation of the item that you also had to pay.
If you bought something to use in your business, for example a van, on hire purchase or by an alternative finance method, you can only claim capital allowances on the cost of the item itself. The interest or other charges count as business expenses.
When you buy an asset, sometimes you will have to pay VAT. If so, then:
You can ask HMRC or your tax adviser for further advice if:
If you need help calculating capital allowances or need other advice, you can ring the HMRC Self Assessment Helpline.
