Getting a tax deduction on machinery or vehicles
A question many new businesses have is how to deal with “fixed assets” when it comes to taxes. Fixed assets are those items bought for use in the business for some years to come, like a machine you use to make the products you sell or desks and computers you use in your office.
Usually when it comes to tax you can claim many deductions from your earnings to reduce the profit you’ll be taxed on. These include business rent, software subscriptions, salaries and wages to name a few, but there are specific rules when it comes to fixed assets. Fixed assets are of a long-lasting nature and usually an expensive investment and treated separately from the usual expense deductions.
You can claim what is called the “Annual Investment Allowance“ which in most cases allow you to deduct the total amount spent on machinery, equipment and some vehicles up to a limit of £1 million per year currently. This does not include motor cars and the assets should not be used privately by the business owner (in the case of a sole trader or partnership).
Fixed assets that do not qualify for the Annual Investment Allowance (i.e. motor cars and assets used privately) will in most cases fall into this second category, the “Write Down Allowance”. This allowance is tricky and have many rates and limits to be aware of.
The third option is the “First Year Allowance” which can be used as a deduction for low emission motor cars, typically electric cars, and other energy efficient equipment. You get the full cost of the asset as a deduction and is part of government’s strategy to stimulate businesses to use greener technology.
These deductions are known as capital allowances. If you are a sole trader or in a partnership with an annual turnover (your sales) below £150,000 per year, there is a simplified alternative called the cash basis which removes a great deal if this complexity if you want to follow that route.
It is useful to keep in mind that when you are just starting your business and buying assets in your first year of trading, chances are you might have a larger capital deduction available than the profits you are trying to reduce or might just have an outright loss for the year. Luckily the capital allowance won’t be “wasted” as losses can be carried forward into a following tax year. In some cases losses can be used in the same tax year or even carried backwards to a previous tax year to ensure you get the full benefit of the capital deduction.
Contact us to talk about tax planning for your business (and for yourself), we’ll be happy to help you get your capital deduction right.