According to the guy in the pub, who has a detailed knowledge of everything, the answer is YES!
Before falling off his stool, he’ll go on to tell you that if your tax bill is £5,000 and you buy a van for £5,000 then you have no tax to pay. Hmm… this is not quite correct. However, some clients claim he is correct, “he seemed to know his stuff!” So, time to put the record straight!
The correct calculation
If your company made taxable profits of £30,000 and purchased a van for £5,000 (claiming the 100% relief) the taxable profits would become £25,000, leaving a corporation tax bill of £4,750. (19% of £25,000)
Pub guy’s calculation
The guy in the pub is working it out as profits are £30,000 so the corporation tax would be £5,700 (19% of £30,000) then deduct the van purchase £5,000 leaving just £700 payable to HMRC.
Pub guy has misunderstood how it works. He’s taken the cost of the van off the tax bill due, rather than the profits. His methodology must be admired, everyone would be paying much less tax!
NB The above calculation uses something called the Annual Investment Allowance (AIA) There is a limit to how much relief you can claim in any one year. (See capital allowance section below.)
What if I want to buy are car?
Cars are subject to special rules. High emission cars are subject to written down allowance at either 8% or 18% depending on emissions. Click here to find the emissions for your vehicle. Low emission or electric cars (less than 50g/km) are subject to first year allowance which is 100%. If you’re buying a car, speak to an accountant first!
Be careful! If the car is a limited company car, the employee could be liable to pay tax on this as a ‘benefit in kind’ The amount is calculated by the car’s emissions. See our blog on this.
What are capital allowances?
Capital allowances are a form of tax relief that can be used for the purpose of tax and cashflow planning, as well as reducing your tax liability. They can be claimed if your company buys an asset, such as a computer, van, machinery, fixtures and fittings or any other large capital item.
Types of allowances
Capital allowances is a complicated area, but to keep it simple there are 3 types of allowances.
Annual Investment allowance (AIA)
This can be claimed against most types of allowable plant and machinery (except ordinary cars). Its effectively 100% allowance on the purchase. The maximum amount of the AIA claimable is £1,000,000 between January 2019 and December 2020.
First year allowance (enhanced capital allowances)
This if for energy efficient assets purchased, the allowance is claimed in the year of acquisition. These items do not count towards the AIA limit. Again, it’s a 100% allowance.
Written down allowances
These are used if you have already claimed AIA or have gone over the limit for the year. Or, the asset doesn’t qualify for AIA (prime example: cars)
Within the written down allowances are a series of pools. Each pool has a different rate.
• Main pool – which is for most plant and machinery, the rate is 18%
• Special rate pool – is used for long life assets or cars with high emissions, the rate is 8%
• Single asset pools – are subject to 18% or 8% depending on the item
If you have any questions about buying cars, vans or capital allowances, feel free to get in touch.
