You are permitted to claim for capital expenditure in certain instances. This tax relief is known as capital allowance.
You can claim capital allowances on:
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If you're buying equipment from April 2012 onwards, 18% of the purchase price is the standard annual allowance for businesses each year. There is a special rate of 8% which applies to expenditure on integral features of buildings, like electrical systems, equipment with a planned life over 25 years and thermal insulation. In several cases you can claim 100% in the year you make the purchase:
A builder purchases a digger for £16,000. Starting in the year of purchase, their capital allowances are as follows:
Year 1: 18% of £16,000 = £2,880 writing down allowance, leaving £13,120 as the reduced balance of the cost;
Year 2: 18% of £13,120 = £2,361.60 writing down allowance, leaving £10,758.40 as the reduced balance of the cost;
Year 3: 18% of £10,758.40 = £1,936.51 writing down allowance, leaving £8,821.89 as the reduced balance of the cost.
Suppose that the builder's trading profits are £50,000, £60,000 and £70,000 for Years 1, 2 and 3 respectively. The builder's income for tax purposes is as follows:
Year 1: £47,120;
Year 2: £57,638.40;
Year 3: £68,063.49.
Originally, for the 2012/13 tax year, all businesses had an Annual Investment Allowance (AIA) on the first £25,000 of expenditure on plant and machinery. However, this was increased on 1 January 2013 to £250,000 – the increase is temporary and is expected to return to £25,000 on 1 January 2015. There is also a tax credit for losses incurred through capital expenditure on some types of environmentally-friendly technologies. In addition, some smaller businesses may be able to claim a plant and machinery writing-down allowance of up to £1,000 where the balance of the pool is less than £1,000 in a 12-month accounting period.