Capital expenditure

The cost of large items of equipment, vehicles etc cannot be deducted from your income as an expense. To cover these, HM Revenue and Customs allow you to deduct what are called “capital allowances”.  Capital Allowances spread the cost of the item over the amount of time that you will use it in your business.

There is an Annual Investment Allowance of which means that 100% of the cost of ‘qualifying expenditure’ can be deducted from your business income up to an annual limit. The limit has changed significantly over the last few years and is due to change again in 2012.

The limit for tax year 2009/10 was £50,000; for tax years 2010/11 and 2011/12 it is £100,000; it is due to be reduced to £25,000 from April 2012.

There is more about the Annual Investment Allowance on the HMRC website at http://www.hmrc.gov.uk/manuals/camanual/ca23081.htm.

The size of the Annual Investment Allowance means that for many small businesses, the full costs of new equipment can be deducted.

The annual ‘writing down allowance’ for any expenditure not covered by the Annual Investment Allowance is 20%; but is due to be reduced to 18% from April 2012. This is given on a ‘reducing balance’ basis. So, for say £1,000 of expenditure, the claim would be 20% of £1,000 (= £200) in the first full tax year. This would leave £800 at the start of the second tax year (£1,000 – 200 claimed in the first tax year). So in the second tax year the claim would be 20% of £800 (= £160).

There are special rules for some environmentally friendly equipment.

Vehicles

Special rules apply to cars.  Cars with very low C0₂ emission vehicles (up to 110 g/km) receive a 100% allowance. Above this level,  and up to 160 g/km emissions,  cars will normally receive a 20% allowance. Over 160 g/km, the rate of allowance will normally be 10%. However, vehicles with private use must be treated separately and an allowance made for private use on each vehicle.

More information about cars can be found at  http://www.hmrc.gov.uk/manuals/camanual/CA23500.htm.

Further information

Detailed guidance on capital allowances is available in the HM Revenue and Customs website Capital Allowance Manual http://www.hmrc.gov.uk/manuals/camanual/index.htm. This is a complex area and it is best to take advice.