Why capital allowances matter more than you might think

You have just spent £3,000 on a new laptop, a mitre saw, or a van. It stings the bank account, but the tax system recognises that you have invested in your business. Capital allowances let you deduct the cost of certain assets from your taxable profits, which reduces your tax bill. For a sole trader paying 40% tax, a £3,000 qualifying purchase could be worth up to £1,200 in tax saved. That is not small change. The catch is that the rules are fiddly, and HMRC expects you to know which pool your purchase belongs in. Get it right and you claim everything you are entitled to. Get it wrong and you either overpay tax or find yourself unpicking a messy set of accounts during an enquiry.

What actually qualifies as plant and machinery

In tax language, almost every tool, machine and piece of kit you use in the business falls under the banner of "plant and machinery". That includes:

• Computers, printers, monitors and software you buy outright
• Tools, machinery and equipment used in your trade
• Office furniture, shelving and fittings
• Vans, lorries and commercial vehicles
• Fixtures and fittings in a shop or workshop, such as lighting, heating and security systems
• Some integral features, including electrical wiring, water systems and air conditioning

Second-hand equipment counts too. If you buy a nearly new forklift or a second-hand oven from another business, you can still claim, provided you keep a proper invoice or receipt. What does not qualify? Items you buy and use up quickly, like stationery or cleaning supplies, are ordinary business expenses rather than capital items. Land and buildings generally do not qualify either, though some fixtures and integral features do. And anything you buy for personal use, or that you use mostly outside the business, needs careful handling.

The Annual Investment Allowance: your first port of call

For most small businesses, the Annual Investment Allowance (AIA) is the simplest and most generous relief available. It lets you deduct 100% of the cost of qualifying plant and machinery in the year you buy it, up to a limit of £1 million. That is far more than most small businesses will ever spend. The AIA covers most equipment, vans, computers and machinery. It does not cover cars, which have their own separate rules. It applies to sole traders, partnerships and limited companies alike. A few points worth remembering:

• The allowance is per business, not per person, so a partnership gets one £1 million allowance between the partners
• You do not have to claim the full amount. If it suits your tax planning better, you can claim part of a purchase this year and the rest later
• It is not automatic. You must claim it on your tax return or in your company accounts

If your accounting period is shorter than 12 months, the allowance is reduced proportionately. Something to watch if you are changing your year end.

Full expensing and writing down allowances

Limited companies have an extra option called full expensing, which gives 100% relief on most new and unused plant and machinery, and 50% on certain long-life assets such as integral features. It is separate from the AIA and can be used alongside it, but it applies only to companies, not sole traders or partnerships. Anything that does not fall under the AIA or full expensing goes into a pool and attracts a writing down allowance. The main pool rate is 18% on a reducing balance basis, and the special rate pool, for items like integral features and cars with higher emissions, is 6%. You claim a percentage each year until the value is used up. This is where things get technical. If you are buying something expensive and the timing matters, it is worth a conversation with your accountant before you commit.

Vehicles: the rules that trip people up

Vans and commercial vehicles qualify for the AIA, so a £25,000 van can be fully deducted in year one. Cars are different, and this catches a lot of people out. Cars cannot be claimed under the AIA. Instead:

• Brand new zero-emission cars attract a 100% first-year allowance
• Cars with lower emissions go into the main pool at 18%
• Cars with higher emissions go into the special rate pool at 6%

If you use a car partly for personal journeys, you can only claim the business proportion of the allowance. Keep a mileage log — a rough estimate will not survive scrutiny.

Keep the paperwork, and keep it tidy

Capital allowance claims depend on evidence, and HMRC can ask to see it years later. For every purchase, keep:

• The invoice or receipt, showing the supplier, date and amount
• A description of the item, with a serial number where possible
• The date you started using it in the business, which is not always the purchase date
• Notes on any personal use, and how you worked out the business proportion

The date you incur the expenditure is generally the date you become unconditionally obliged to pay, not the date the money leaves your account. Timing can shift a claim between tax years, so check before you sign on the dotted line. Set up a simple folder, physical or digital, for equipment purchases. It takes minutes and saves hours later. If you sell or dispose of an asset, note that too — the proceeds may create a balancing charge that adds back to your profits. Good records make that calculation straightforward rather than painful.