Define Capital Allowances
In some places, including the United Kingdom and Ireland, capital allowances are deductions from a company's taxable profits, based on investments in fixed assets, such as when purchasing equipment. When a business invests in machinery and other assets, it can deduct a portion of these costs from its taxable profit, and reduce the amount it has to pay in taxes. Apart from purchases, these tax allowances are available on investments in upgrading plant and machinery, modifying commercial spaces, and research and development costs.
Other People Are Reading
-
Investment Types
-
The amount of tax allowance granted depends on what investment type the capital allowance is requested for. The rate of allowance is set yearly and is based on what type of fixed asset a business purchases for its operations. Even if the costs of two separate purchases, one for machinery and one for buildings, are similar, the amount a business can claim on the costs will vary because the two purchases, being different classes of fixed assets, have different rates. The capital allowance system eliminates the need to be subjective when developing depreciation schedules for its assets.
Restrictions
-
In general, a business cannot claim for capital allowances for purchasing goods that are considered a part of its trade. For example, an electronics retailer that sells refrigerators cannot claim tax allowances for purchasing refrigerators and stocking them in inventory for sale. However, a retailer selling fresh fish may claim capital allowances on purchasing a refrigerator because the unit is a business investment, and is not directly involved in the retailer's trade. Additionally, for assets bought on hire purchase, a claim can only be made for the original price of the unit, and not for subsequent interest payments.
-
Plant and Machinery
-
Capital allowance can be claimed on facilities and machinery, as well as assets such as cars, trucks, vans and equipment including furniture, interiors, ladders and other general tools required for day-to-day operations. A business can also claim for capital allowances on facilities and machinery that were being used privately by the owners before being put into the business, and for property or items that are only partially used in the business.
Property
-
A business may claim capital allowances for renovating, remodeling, modifying and constructing commercial premises. If a business renovates qualifying property it currently owns, to provide space for rent, or if a business converts qualifying business premises in disadvantaged areas, it can claim for capital allowance on the cost of the renovation. Businesses can also claim on the construction and purchase of industrial and agricultural business facilities.
Claims
-
Capital allowances are claimed with tax returns. A business is not obliged to claim for the full 20 percent of the costs, and may claim for less than the maximum allowed percentage. In case a smaller claim is made, the business has the option to make a proportionally larger claim when claiming for capital allowances again in the future. Also, for businesses registered as partnerships, the claim should be made collectively from the enterprise, and not individually as partners.
-
References
- Photo Credit factory image by e1129783 from Fotolia.com
