Do you have business interests in the United Kingdom? If so, you’re one of 7,500 American businesses that have a presence in the UK.
Being an international company can be challenging because you have more tax responsibilities. You still have corporate taxes to pay in America, and you have tax responsibilities in the UK if you have a presence there.
You need to know the tax laws and how business finance works in both countries to make sure that you comply and you can take advantage of various business deductions. One such deduction is the capital allowance deduction.
Read on to find out what it is and how you can take advantage of it when you file your British taxes.
What Is a Capital Allowance?
When you set up your company in the UK, you probably had to buy a lot of equipment and maybe even property. These are considered to be tangible business assets because they have some value.
There are also business assets that are considered to be intangible. These assets are often related to branding, research, and intellectual property.
A capital allowance lets you deduct these expenses from the business profit because these expenses aren’t a part of your standard operations. For example, your payroll and monthly expenditures would be a part of your operating expenses.
Since you have to make additional investments beyond your monthly expenses in order to grow, capital allowances give you the incentive to do that.
How to Deduct Capital Allowances
There are a couple of ways you can deduct capital allowances from your British taxes. Each method offers different tax advantages, and you want to choose carefully.
If you choose the wrong method, you could wind up paying for it later. Believe it or not, a capital allowance works like depreciation or buying equipment for your business.
On your American taxes, you could claim the entire purchase upfront, or use depreciation to claim a portion of that purchase for years. Let’s take a look at the options that the British tax code gives you.
First-Year Capital Allowance
This is commonly used in startup companies and small businesses. It’s meant to incentivize businesses to make the necessary expenses to start their business on the right foot.
Too many businesses tend to bootstrap their way through the startup phase. That form of startup business financing can prevent growth.
What if you’re a self-employed person doing business in the UK? This is more common for digital nomads who claim residency in the UK. You can still claim a capital allowance for an item, even if you use that item for personal and professional use.
For example, you’d spend £500 on a mobile phone that you use 50/50 for business and personal reasons. You’d deduct 50% of the cost of the phone since that’s used for business.
Annual Investment Allowance
This is a tax scheme that the British government created in order to create economic growth. By giving businesses faster tax relief, they’d be more likely to spend money on major improvements and investments.
This is primarily used to purchase plants and machinery equipment. You have the option to take an immediate deduction of up to £1 million for the accounting period between January 31, 2020, and December 31, 2020.
The amount was increased from £200,000 prior to the Coronavirus pandemic rocking the global economy. It’s yet to be seen if this will change.
The AIA works a little differently than depreciation on your American taxes. With depreciation, you can purchase a property and write off the cost for 27.5 years by dividing the total cost of the purchase by 27.5.
The AIA lets you claim the expense over a period of two years up to the maximum allowance of £1 million.
What Can You Use Capital Allowances For?
Many people get confused by what qualifies as a capital expenditure and what doesn’t. It’s actually simplified because there are a few categories of purchases that are capital allowances. These are the primary categories to be aware of.
Plants and Machinery
You don’t need to be a manufacturing company to be able to invest in plants and machinery. It’s actually a very broad category that includes vehicles, machinery, or equipment that you use in your business.
You may have to invest in delivery trucks, warehouse space, or manufacturing equipment. These all would qualify for capital allowances.
Property Improvements
If you rent a property for income, you could write off minor improvements to the property. You can do the same if you own or lease your office building, as long as the improvements have a business purpose.
Adding a new heating or cooling unit would qualify, as would lighting fixtures. To qualify for a rental property, you have to have the rental available for at least 210 days a year and rent it for a minimum of 105 days.
Research and Development
If you invest in innovation and research, you could claim those expenses as capital allowances. This includes typical lab research and extends beyond that to oil and gas exploration.
HMRC has this detailed guide as to what expenses qualify for the capital allowance deduction.
Understanding Business Finance
Whenever you have to pay business taxes, the goal is always to pay as little tax as possible. If you do business in multiple countries, like the United States and the United Kingdom, you want to know the tax laws that you can use to your advantage.
You can learn about business finance and tax schemes like the capital allowance deduction. This is a program that can help all businesses, from the self-employed to massive corporations, invest in their businesses and be rewarded for it.
