How can Capital Allowance Help Me?
Most of us would like to save on the taxes that we pay to the government.
Businesses pay taxes on their business profits. By reducing the amount of profit that is taxable, we can save on taxes.
You cannot show reduced profits by resorting to creative accounting because creativity is not appreciated in this field, particularly by investors and tax authorities.
The only way you can reduce profits is by including all the expenses that tax authorities allow you to deduct from your revenue before arriving at the taxable profit. Capital allowance is one such expense that is legally allowed to be deducted.
Capital allowance can be seen as the writing down of long-term assets used in the business. These assets will typically be used for several years and the cost of the asset is spread over this useful life.
Tax authorities have estimated the useful lifetimes of the major classes of long-term assets and have also prescribed how to compute the capital allowance over this period. For example, you can claim capital allowances at 20% of the “declining value” of Plant & Machinery every year.
While most businesses already claim allowed capital allowances on moveable assets such as plant, furniture and office equipment, that is not typically the case in the case of buildings. It is estimated that 96% of buildings have not their capital allowances claimed.
This happens because the rules for computation of capital allowances on buildings are complex. You cannot claim a specified percentage of the total value of the building. Instead, you must identify the “moveable” items such as light and water supply fittings, air conditioning plant and so on, value them and claim capital allowances on this value.
There is no time limit for making capital allowance claims, and you can save a significant amount of tax by getting an expert on capital allowance claims help you make the claims.
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Fraudulent claimants threaten legitimate allowances
Businesses are able to claim capital allowances when they enter into a long funding lease for their buildings and machinery.
However, some firms are attempting to claim back twice their entitled tax relief by entering into, “contrived, circular transactions involving the sale, leaseback and reacquisition of their plant and machinery” over a period of a few weeks.
In a written statement to MPs, Treasury Exchequer Secretary David Gauke said: Legislation, which will have effect from today (Wednesday 9th March), will be introduced in Finance Bill 2011 to confirm that lessees engaging in transactions of this type are only entitled to tax relief up to the actual amount of their expenditure on plant or machinery.”
He also explained that this legislation would be forcibly enforced so as to “protect future losses to the Exchequer”.
However, whilst some firms are over-claiming on their capital allowances, a whole host of others are completely unaware that they are entitled to claim anything. Consequently, they may be missing out on large sums of money.
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FLA urges Treasury to extend green tax relief
The Finance and Leasing Association (FLA) is calling on the Treasury to extend tax relief on energy efficient equipment to the asset finance sector.
The association believes that the extension would benefit small businesses and is calling specifically for the relaxation of the Enhanced Capital Allowances (ECAs) to cover energy saving equipment hire.
ECAs enable a business to claim up to 100 per cent first-year capital allowances on their spending on qualifying plant and machinery. Currently the ECAs apply to businesses that purchase equipment with a bank loan but not when that equipment is leased.
The FLA claims that if the ECA system was extended to include leasing companies, it would support investment in energy efficient companies by small businesses, because the benefits would be passed on through better commercial leasing rates.
A spokesperson for the FLA told Greenwise: “It would give the asset finance companies the scope to pass on the ECA through decreased rentals.”
It is hoped that, as well as offering small businesses increased support, the FLAs latest bid to the Treasury may highlight the many other benefits that can be gained through ECAs.
This article was written by Katie-Jill Rowland
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Capital allowances ‘a right not a privilege’: another service to offer
Every time a commercial property owner spends money buying or improving it, there is a strong chance they can offset that expenditure against profits or general income for tax purposes – a little tapped resource offered by the Inland Revenue.
Indeed, the ability to claim capital allowances on commercial properties has been available to property owners since 1878. Most people believe that their accountant have already claimed everything, yet HMRC estimates a massive 96% of those eligible for a refund have not claimed.
Aware that the process of claiming such a tax rebate is not straight forward, Short Term Asset Finance decided it time to speak to the experts and learn how advisors can start offering this service to clients.
“HMRC has made claiming very complicated” Shaun Murphy, of specialist advisors Portal Tax Claims tell me. “Most accountants simply can’t deal with it, or think they are doing it already when they’re not. There it is an enormous under tapped resource out there.”
Effectively our surveyors will do an onsite survey and identify all the inherent plant & machinery hidden which is taken for granted within the original purchase price from which our accountants will then create the accredited HMRC approved report for submission
Portal Tax Claims promises to manage every stage of a claim’s process and offers ‘a no report no fee’ guarantee.
They will look at the purchase price paid by a company for the property and in most cases claim about 25% back, offset against the company’s tax bill.
Tax Rebates can be backdated as far as 2008/2009
A trade company, Portal Tax Claims doesn’t accept business from clients direct, but insists on an introduction from an advisor, and is currently turning over 200 claims a month.
Shaun believes the 96% not claiming is down to the complexities involved in a claim and the sheer lack of public awareness.
“Think about it, all those brokers out there, they can revisit all their old clients – at no cost to their clients – and they can say ‘whatever you’ve paid for the purchase price of a building, we can get about 25% back off that purchase price to offset against your current tax bill.’
“What we do is we go back and we unlock the hidden inherent value of the purchase price.”
Portal Tax Claims are so confident they will be able to make a substantial claim, they underwrite their offer:
“If we can’t identify an additional £25,000 in unclaimed capital allowances, we will give you our report entirely free of charge. You won’t owe anyone a penny.”
Based in Rochester, the company has in excess 300 agents across the country and is forecasting substantial company growth; “we’re aiming to bring our claims up to 500 a month, we’re growing exponentially,” explains Shaun.
Portal Tax Claims take 6% for their services (as a percentage of the identified capital allowances).
The process takes an average of eight weeks to complete and six stages are involved. Introducers are notified by text message alerts every time a stage is completed, “we do our upmost to make sure the introducer is well informed and never left in the dark.”
All reports and all surveys are managed by Portal Tax Claims, and introducers are paid by automatic direct debit as soon as the rebate completes and Portal is paid.
There are five simple questions that must be answered before a claim should be made:
1. Did the property cost £200,000 or more? Answer must be Yes
2. Is the owner subject to UK tax? Answer must be Yes
4. Has the owner paid UK tax within the last two years OR likely to pay tax in the next 2 years ? Answer must be Yes.
3. Is the property owned by a charity or pension fund? Answer must be No as charities and pension funds already have separate tax breaks.
5. Has the owner made a claim before against the actual purchase price of the bulding ? Answer must be No .
Shaun describes the average claimant as being a limited commercial company, who is the owner-occupier of a property with an average purchase price of £600,000.
On average, Portal Tax Claims find £150,000 worth of capital assets, which are then used to reduce the company’s tax bill by £42,000 – provided they are a 28% corporation tax payer.
Aware that that for many brokers capital allowances is an area they are not too familiar with, the firm has spent a substantial amount of time on its website, which includes mini step-by-step video guides, power point presentations, pdfs providing FAQs, a Capital Allowance History guide; all available to download for free.
“We want out brokers to be informed, the education process is the hardest part about it, but we’re going to get there,” says Shaun smiling.
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History of Capital Allowances
Up to late 19th century (1878 to be precise) there were no capital allowances.
In 1878, a “wear and tear” allowance was introduced for traders in plant and machinery by allowing them to reduce their income by the allowance amount. For mills and factories, a “mills and factories” allowance was available. The quantum of the allowance was an amount considered “just and reasonable” and tended to represent the “economic” depreciation in the value of the equipment.
A new system of allowances was introduced in 1945 to replace the above allowances. The wear & tear allowance was replaced with:
- An initial allowance of 20% on plant & machinery for the first year
- Annual writing-down allowances to represent the usage of the asset over the years; the rate was fixed by Inland Revenue and was generally 25% for plant & machinery
- A balancing adjustment when the asset was retired or sold to ensure that the total relief was equal to the actual reduction in value over the period of ownership
The mill & factories allowance was replaced by:
- An initial allowance of 10% on new buildings
- Annual writing-down allowances at 2%
- A balancing adjustment when the asset was retired or sold to make total relief equal to actual reduction in value
The building allowance was confined to industrial buildings, and shops, offices and even hotels were excluded.
An investment allowance, over and above the allowances above, was introduced in 1954 to encourage investment in industrial assets including buildings.
The system was simplified in a major way in 1971 to eliminate burdensome record-keeping and computational requirements. A further simplification in 1984 saw the elimination of initial and first year allowances, among others.
There were other changes reintroducing and withdrawing different allowances in pursuit of specific policies until capital allowances were consolidated in 1990. There was a further revision and the current legislation is CAA2001.
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