What Is a Capital Allowance? Everything British Business Owners Should Know

Owning an international business is complicated. You have different tax rules, terminology, and ways to do business.

Even living abroad and doing business elsewhere is complex. About 58% of small businesses have international customers, and there are businesses that want to expand offices into other countries.

If you do business or own property in Britain, you have a number of tax deductions that you wouldn’t have in the US. One of them is the capital allowance deduction.

Read on to find out what the capital allowance deduction is and how you can qualify.

What is a Capital Allowance Claim?

A capital allowance claim is where you write off expenses related to a capital asset in your business. What’s a capital asset? It’s an asset that you use in your business for two years or more.

You may think that a capital asset is only related to property. That’s not the case. Capital assets can be tangible assets, such as property or business equipment like a laptop computer or tablet. There are also intangible capital assets, such as intellectual property.

These types of expenses are outside of your normal operating expenses and qualify for the capital allowance claim.

A capital allowance claim allows you to deduct the cost of these purchases from your profits, which will lower your tax obligations.

The Surprising Items You Can Claim on Capital Allowances

One of the categories to claim a capital allowance deduction is called plants and machinery. Commercial property, fixtures such as lighting, air conditioning units, cars, and of course, machinery.

There is one caveat when it comes to claiming a capital allowance deduction on property that was purchased before or after new capital allowance rules came into effect. You can find more information about these changes here.

Research and development expenses can also qualify as a capital expenditure.

How to Claim Capital Allowances

If you want to claim capital allowances, there are two ways to go about it. The first way is to take a first-year deduction, where you claim the entire expense in the first year.

The other option is to take the Annual Income Allowance (AIA). This is similar to depreciation on your American taxes. You can deduct a portion of the expense over several years.

The AIA can be used by any business, whether a sole proprietorship, corporation or partnership. For the next two tax years, you can claim up to £1,000,000 in allowances.

There are some items, such as cars and items that are used for business entertainment, that you can’t claim the Annual Income Allowance.

Reduce Your British Taxes with Capital Allowances

If you’re going business in Britain, you have to relearn the tax system. One of the business taxes that you need to be aware of is the capital allowance deduction.

You’re able to use capital allowances to lower your tax bill on items that fall outside of your normal operating expenses. It’s a great way to use the tax code to your advantage.

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