Capital Allowances (CAs) are purely a tax invention used to standardise the rates for depreciation of assets used in business. To give a “true and fair” picture of an individual business’s profitability, the rate of depreciation of an asset is tuned to its particular usage. For example, a van used by a delivery company may usefully last 3 years (e.g.: 33% straight-line depreciation), whereas that same van used by a local shop may last for a decade (e.g.: 10% straight-line depreciation). However, to standardise the rate of “depreciation” for tax purposes and avoid abuse, depreciation is not an allowable deduction against business profits and CAs are used instead.
But must you claim them?
The answer is no – you are not forced to claim CAs each year and strangely there are often very good reasons why you may consider waiving your entitlement. CAs work on the basis that you ultimately obtain tax relief for the amount of business use suffered during the ownership of the asset. The cost of the asset is introduced on purchase and relief is given across the period of owning the asset (frequently on a reducing balance basis but sometimes at an increased rate of First Year Allowances / Annual Investment Allowance – FYA/AIA). When the asset is disposed of, the sale proceeds are recorded and any difference between the amount of relief given and the actual difference between purchase and sale is taken into account – sometimes with a sting if you have had more relief than you are ultimately entitled and a Capital Allowance charge arises (see last month’s article). The total Capital Allowance claimed each year is given as a deduction against your profits.
The method of writing down the allowances means that if you waive your entitlement to relief in one year, you can carry forward the unclaimed balance of value to the following year. You do not lose the unclaimed balance (albeit that you may only be able to claim at a reduced rate the following year rather than at an improved rate as part of the FYA / AIA or on a change in legislation).
There are a number of reasons why you may chose not to claim your CAs in a particular year:
- If your profits (self-employed or in partnership) are low enough to be covered by your personal allowances and by claiming CAs they would not actually decrease your tax and NIC liability
- Should you wish to increase the effectiveness of any averaging claim (principally farmers)
- If you wanted to show higher profits for pension contribution or mortgage purposes
- To avoid an income tax charge from excessive Gift Aid donations
- In order to increase an expected tax loss for a later year when you would have other income or capital gains for sideways loss relief
- In preparing your business for sale and you wished to sell with greater retained asset value for tax purposes
- If your business was coming to an end and you wanted to decrease balancing charges on cessation (see last month’s article)
- To utilise some losses brought forward that may otherwise be lost
A couple of points to consider when considering waiving your entitlement:
- HMRC cannot force you to make a claim for capital allowances each year;
- You need to do the maths
- You can choose to disclaim some or all of any capital allowances (for example claim relief on your short-life assets but waive entitlement to longer life assets)
- Consider what will be happening in the future – for those taxpayers represented by accountants, please tell them of what may happen in the future so that these things can be considered as part of your annual review – if we don’t know about it, we can’t plan for it!
- You may end up waiving your entitlement to CAs at one rate to replace it in a later year with a lower rate (but ultimately you will still receive the same amount of allowance over the life of the asset – it is just the timing of when you receive the relief that you are adjusting)
- Try to get the claim (or waiving of entitlement) right first time as HMRC take a dim view to reopening accounts for any Returns that have already been filed (even if you are allowed to reopen them) as at the very least it can bring you unnecessary attention to your affairs
- Take professional advice unless you understand all of the implications.
By sitting back and not automatically claiming every allowance at the first opportunity, you can potentially avoid wasting your CAs, maximise how relief is generated and reduce potential charges on cessation.
For further information on any of the above points or to discuss your tax affairs generally, please do not hesitate to contact Robin Beadle.