For tax purposes, the method of claiming asset depreciation is known as Capital Allowances (CAs). These operate on a reducing pool of value basis using HMRC-prescribed rates ranging from 2% to 100% depending on the asset (and tax year) involved. These allowances are then treated as deductions against your annual profits.
But must you claim them?
The answer is no – you are not forced to claim CAs each year and there several reasons why you may choose to waive your entitlement, especially as you generally do not lose the unclaimed value (so you are able to continue claiming in a following year where you left off). You may wish to waive CAs when:
- Your profits are low enough to be covered by your personal allowances and by claiming CAs they do not affect your tax and/or NIC liability
- You wish to increase the effectiveness of any averaging claim
- Higher profits are needed for pension or mortgage purposes
- Claiming them might trigger an excessive Gift Aid donation charge
- Other loss relief (which may be lost if not claimed) can be used instead
- There is a large Balancing Charge (where on disposal the relief you have had exceeds residual value) ahead upon a planned cessation.
A few points to consider when considering waiving your entitlement:
- HMRC cannot force you to make a claim for CAs each year
- You need to do the maths
- You can choose to waive some or all of any capital allowances
- Consider the future
- 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 CA claim right first time as HMRC take a dim view to reopening accounts
- Take professional advice unless you understand the implications
By not automatically claiming every allowance at the first opportunity, you can potentially avoid wasting your CAs against other allowances or losses, maximise how relief is generated and reduce potential charges on cessation.