Understanding capital allowances is crucial for businesses looking to reduce their Corporation Tax bill – especially for those with plans to invest in vehicles, machinery, or equipment.
Capital allowances enable companies to offset the costs of these capital assets against their taxable profits, thereby reducing their overall Corporation Tax liability.
We are often approached by businesses who are unaware of the true scale of savings that can be made through capital allowances, particularly when it comes to investment in electric vehicles.
What Are Capital Allowances?
Capital allowances are designed to encourage businesses to invest in new assets, which in turn stimulate economic growth.
There are various types of capital allowances available, including:
- Annual Investment Allowance (AIA): This provides a 100% deduction for the first £1 million of expenditure on qualifying plant and machinery, although there are exclusions like cars.
- Writing Down Allowances (WDA): These are calculated for assets that don’t qualify for AIA, based on a percentage of the asset’s value.
- First-year Allowances (FYA): Special 100% allowances for certain environmentally beneficial plant and machinery, including some types of electric cars.
- Full Expensing: Full expensing is a 100 per cent first-year allowance for companies, enabling them to claim a deduction equal to the full cost of qualifying expenditure on main rate plant or machinery during the year the expense is incurred.
Companies can also benefit from the 50 per cent first-year allowance (FYA) for expenditure by companies on new special rate (including long life) assets until 31 March 2026.
Enhanced Capital Allowances
Like the AIA, where an asset qualifies for this allowance, you can deduct its full cost from your profits before tax.
You can claim Enhanced Capital Allowances for a wide range of eco-friendly improvements to your business, including:
- Environmentally beneficial and energy-saving technologies
- Electric cars and cars with zero CO2 emissions
- Zero-emission goods vehicles
- Equipment for electric vehicle charging points.
To qualify for this relief the equipment must be new and unused. You also cannot typically claim items your business buys to lease to other people or for use within a home you let out.
If you do not claim all the first-year allowance you’re entitled to, you can claim part of the cost in the next accounting period using writing down allowances.
You would typically use Writing Down Allowances instead if you’ve already claimed AIA on items worth a total of more than the AIA amount or if the item does not qualify for AIA.
The electric car revolution
With the UK government’s commitment to ban the sale of new petrol and diesel cars by 2030, electric vehicles (EVs) are fast becoming the future of transportation.
For businesses, this shift presents both challenges and opportunities. There are a variety of tax advantages on offer by purchasing an electric fleet, but let’s explore the capital allowances that are available.
The Importance of First-year Allowances
What’s noteworthy is the role of First-year Allowances in accelerating the adoption of electric cars.
Businesses that purchase electric vehicles can benefit from a 100% FYA, allowing them to write off the entire cost of the vehicle against their taxable profits in the year of purchase.
This is a significant incentive for businesses to transition their fleets to electric cars.
Because you are likely to be able to reduce your pre-tax profit significantly, you may want to consider in which tax year you make the purchase. The benefits may be greater in a year with higher income.
Should you subsequently sell the car, however, there will be a tax charge on the amount received.
You can claim Capital Allowances when buying outright or with a hire-purchase agreement, but not with a lease.
Leasing
There are two types of leases, an operating lease, and a finance lease.
An operating lease is where the business simply pays a rental payment to the legal owner of the asset. All the expenses incurred can be offset against business profits.
A finance lease is where the business is required to treat the lease in the same way had it bought the vehicle by way of a loan. The business will therefore depreciate the asset over its normal life and will charge depreciation and interest payments against business profits. This is one of the only times a business will get a tax deduction for depreciation.
In either situation, the asset is being borrowed from someone else, so no capital allowances can be claimed.
Where the vehicle in question has CO2 emissions of 50g or more, only 85 per cent of the lease costs will be allowable.
If your business is VAT registered, you can also reclaim 50 per cent of the VAT relating to the lease of company vehicles.
Charging Infrastructure
Furthermore, the capital allowances extend to charging infrastructure for electric vehicles. Companies can claim allowances for the costs incurred in setting up charging stations, thus further lowering the barriers to electric vehicle adoption.
Preparing for a greener future
Understanding and maximising capital allowances can offer a dual benefit for UK businesses: reducing tax liabilities and contributing to a more sustainable future.
With generous allowances for electric vehicles and their associated charging infrastructure, companies have a tangible financial incentive to adopt greener practices.
Want to learn more about the various tax benefits of electric vehicles? Please speak to our team.