"capital allowances" - how do they work? and for how long?(13 Posts)
my memory's a bit fuzzy, but i seem to remember that if you buy things like computer equipment (and things which aren't utterly disposable like paper) - that they would be considered "capital allowances"...
and also that if you haven't basically made much money, that it was okay to keep the receipts of these for a number of years (can't remember how many years it is/was though - anybody know?) and these type of expenses could be used to reduce my tax bill in a future year.
anybody know more about this? or could redirect to me the right hmrc page? or know how many years that you can hold over these type of expenses for?
On another part of mumsnet somebody posted:
"You don't have to claim capital allowances in any particular year and if you don't then the pool balances carry forward indefinitely, or until you stop trading."
Is this correct or incorrect?
They also posted this bit as well:
"Special rules apply for private cars and certain other assets, but for general things like computers any amount not claimed as Annual Investment Allowance goes into a General Pool and you can claim Writing Down Allowance on the balance of this pool at the rate applicable in a future year (currently 18%), or Small Pools Allowance for the whole balance if this is no more than £1,000. Note that you can only claim Annual Investment Allowance in the year you purchase an item, so this is not he same as just "holding over" recognition of an expense, which is not allowed."
Some of what has been said in the above paragraph though, I don't understand. Just the language is a bit over-my-head. It's a bit accountancy-ese for me. I guess for me to understand such things it would need to be in more idiot proof terms probably.
As I understand it, stuff you use up is "expenses", stuff that remains company property from year to year is "capital". The "writing down" allowance of up to 18% per year accounts for the depreciation of capital items (they are worth less as they age).
HMRC run free webinars (I hate that word!) on expenses and such like, look on the website.
how long does this business go on for? can you hold on to receipts for 10 years or more to use them in claiming capital allowances? are there time limits?
Each year since you bought the item you can claim 18% of the value (assuming the item is only used for business), but the value the next year is taken to be 18% lower, then year 2 you can claim 18% of that value IYSWIM. I doubt there'd be much value left after 10 years to claim anything appreciable.
Year 1: value £100, claim £18
Year 2: value £82, claim £14.76
Year 3: value £67.24, claim £12.10
Year 4: value £55.14, claim £9.92
Year 5: value £45.22, claim £8.14
Year 6: value £37.08, claim £6.67
Year 7: value £30.41, claim £5.47
Year 8: value £24.94, claim £4.49
Year 9: value £20.45, claim £3.68
Year 10: value £16.77, claim £3.02
See how the value diminishes over time, that's depreciation of the item's value due to its age. You don't get more by ignoring these writing down expenses in some years, as the item still depreciates, and is assumed to lose value each year, whether you claim or not.
good answer. i think i'm finally getting my head around this. and apparently there's no time limit on how old the receipts are. apparently also you don't have to have make a claim every year if you don't want to, you can hold off claiming for a year or so if you don't want to and also you don't have to claim the whole 18 percent.
thanks for idiot proof answer. anything else i need to know about this and or am in not understanding.
I think I almost understand this now. Essentially if you don't claim an allowance for something like a computer in the year it was purchased (as Annual Investment Allowance) - because you didn't do so because it wasn't worth doing so because you didnt earn enough money - you can claim up to 18% of its value in a subsequent year when it may be worth doing so if you've earned enough money for it to be worth doing so. And say you claimed 18% in 2008-2009 of a £700 computer, you could then if you wanted claim 18% of 82% of £700 in 2009-2010.
And the years don't have to be consecutive, I believe?
Not sure how far you can go back in time, though? To when you started trading? Or before?
What if buy a tool and it breaks for example, but you haven't earned enough for it to be worth claiming for AIA, but you've kept the receipt for it - can it still be used later as WDA?
And how does "Small Pools Allowance" work?
The years you don't claim, the value of the items will still fall by 18% per year though, so if you miss a year you'd need an extra iteration of the 18% less calculation to work out how much to claim.
It is also more complicated if you use the items for non-business purposes, then you can only claim a proportion of the 18%. For example, if you used a computer 50/50 for business or personal, you could only claim 9% not 18% as it is only a business item for half the time.
If you buy something that is eligible for AIA or FYA then you should claim them. If you don't make enough profit to cover the CA then any loss you make can be carried forward against future profits, otherwise you will lose it!
Small pools allowance: of you have something in a separate pool, like a high co2 car or a short like asset, then when the balance is £1000 or below you can claim CA for the balance.
re: inmyspare time "so if you miss a year you'd need an extra iteration of the 18% less calculation to work out how much to claim."
i'm probably being monstrously think, for what does that mean in idiot-proof english?
re: baabaapinksheep: "Small pools allowance: of you have something in a separate pool, like a high co2 car or a short like asset, then when the balance is £1000 or below you can claim CA for the balance."
again, i'm probably being monstrously think, for what does that mean in idiot-proof english?
The if you miss a year point is wrong.
Basically, if you buy a capital item, such as a computer you can claim for capital allowances to reduce your tax bill at the 18% rate but you do not have to. This applies to all assets from any period where you run the same business (could be 50 yrs ago).
The calculation is, each year all relevant assets are added to the general pool and you take 18% - if you do not earn enough you could not claim and would get the 18% the following year instead.
You could claim and make a tax loss, which you could also use the next year - the choice would depend on your circumstances and sometimes business losses can be used to offset income from eslewhere.
The point about the small pools - not everything has an 18% allowance, so has to have a separate calculation. In order to avoid keeping paperwork for ever, when it is below £1,000, you can just claim the whole amount.
Sorry doesn't help that my post was full of typos! If you have* and short life asset* is what I meant. Explanation above
As I understand it, the writing down allowance is an expense claim for the depreciation of an item you use, but don't use up, for work. Not claiming for it on a year you make a loss will not prevent the item depreciating, so logically the 18% reduction in value will apply whether you claim it or not.
It's not the same as depreciation. All capital items are depreciated in the accounts, but depreciation (and capital expenditure) is not tax deductible. Capital allowances allow you to claim tax relief on a proportion of capital expenditure , if you don't claim any capital allowances one year then your taxable profit will be higher.
It is actually more worth while claiming capital allowances even if you don't make a profit, as they will increase your loss which can then be carried forward and set against future profits, on which you will also claim capital allowances. In the long run you will pay less tax.
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