The cost of acquiring capital equipment in a business is not a tax deductible expense. Instead, tax relief is available on certain capital expenditure in the form of capital allowances.
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The allowances available depend on what you are claiming for and are not generally affected by the way in which the business pays for the purchase. For example, where an asset is acquired on hire purchase (HP), allowances are generally given as though there was an outright cash purchase and subsequent instalments of capital are ignored. However, finance leases, often considered to be an alternative form of purchase and which for accounting purposes are included as assets, are denied capital allowances. Instead, the accounts depreciation is usually allowed as a tax deductible expense.
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Any interest or other finance charges on an overdraft, loan, HP or finance lease agreement to fund the purchase is a tax deductible expense and capital allowances are not available.
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Alternatively, if a business rents capital equipment, often referred to as an operating lease, then as with other rents this is a tax deductible expense and capital allowances are again not available.
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Plant and machinery
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This includes items such as machines, equipment, furniture, computers, cars, vans and similar equipment that are used in a business.
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Expenditure on all items of plant and machinery are pooled rather than each item being dealt with separately, with most items being allocated to a main rate pool. However, assets which are used partly for private purposes by a sole trader or partner in a partnership are allocated to a single asset pool to enable a private use adjustment to be made.
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Most businesses are able to claim an Annual Investment Allowance (AIA) on most plant and machinery which provides immediate 100% tax relief on qualifying annual expenditure. Relief is given on the full cost up to a maximum allowance of ?25,000 for a full year (previously ?100,000). Special rules apply to determine the AIA for an accounting period that straddles April 2012. Please check with us if required.
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A writing down allowance (WDA) on the main rate pool of 18% (previously 20%) is available on any expenditure incurred in the current period not covered by the AIA or not eligible for AIA as well as on the balance of expenditure remaining from earlier periods.
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Certain expenditure on fixtures in buildings, known as integral features, is only eligible for an 8% WDA (previously 10%) so is allocated to a separate special rate pool. Certain cars are also allocated to this pool.
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Where the accounting period straddles 1/6 April 2012 it will be necessary to calculate hybrid WDA rates which will give a rate between 20% and 18% (or between 10% and 8%) for that period.
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Special rules for cars Other vehicles are treated as main rate pool plant and machinery but cars are not eligible for the AIA. The treatment of car expenditure acquired from 1 April 2009 for companies and 6 April 2009 for unincorporated businesses is based on the CO2? emissions of the car. Pre April 2009 acquisitions (not dealt with here) were generally dependent on cost.?
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A 100% first year allowance (FYA) is available on new low emission cars?purchased (not leased) by a business. This is generally available, where a car?s emissions do not exceed 110 grams per kilometre (gm/km), until?31 March 2013.??
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| Type of car purchase | Allocate | Allowance |
| New low emission car not exceeding 110gm/km CO2 | Main rate pool | 100% allowance |
| Not exceeding 160gm / km CO2 | Main rate pool | 18% WDA (previously 20%) |
| Exceeding 160gm/km CO2 | Special rate pool | 8% WDA (previously 10%) |
Changes ahead
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Legislation will be introduced next year to reduce the CO2 threshold for a main rate pool car attracting the 18% rate. This will reduce to 130gm/km?CO2?to match EU emissions targets for 2020. This will apply to cars acquired on or after 1 April 2013 for companies and 6 April 2013 for unincorporated?businesses.
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The availability of the 100% FYA on new low emission cars will be extended for?a further two years for purchases from 1 April 2013 but only where emissions?do not exceed 95gm/km.?
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| Type of car purchase | Allocate | Allowance |
| New low emission car not exceeding 95gm/km CO2 | Main rate pool | 100% allowance |
| Not exceeding 130gm/km CO2 | Main rate pool | 18% WDA |
| Exceeding 130gm/km CO2 | Special rate pool | 8% WDA |
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