In business, what is capital allowance?

[meagain]

What difference will an increase to 40% in the budget mean? Sorry to be dim, but was wondering...

[The Ben]

I believe it is, and I could be wrong(which is likely), that say you bought an asset for your business you can/could now write off 40% in their first year....

[youngsyr]

If a company buys an asset, in the UK it normally spreads the cost of that asset through it's profit and loss acount over the expected life of the asset.

For example, Digger Plc buys a JCB bulldozer for £100,000 and it expects to scrap it (gain £0 for it) at the end of its 5 year life.

The cost ("depreciation") in the company's profit and loss account for the JCB is £20,000 per year for the next five years, and it reduces the company's profit by that amount for each year.

Digger Plc, makes £500,000 profit per year and like all UK companies is taxed on its profits multiplied at a certain % (the tax rate).

However, for tax purposes for some assets the government encourages companies to buy certain assets (computer software, investment in new products etc) and so allows them to take more than the depreciation on the asset as an allowable expense against their profit.

So, in the above example, a 40% capital allowance on JCBs will allow Digger to take £40K (£100K x 40%) off of his profits for tax purposes, so instead of paying the tax rate x his £500K profits, he pays the tax rate x £480K profits (£500K accounting profit add back the £20K depreciation, subtract £40K capital allowance).

So, in essence a capital allowance is a tax incentive for companies to invest in certain types of assets.

[JagLover]

youngsyr said:

So, in essence a capital allowance is a tax incentive for companies to invest in certain types of assets.

It can be for a limited range of assets, but in General the purpose of a capital allowance is to allow a company to obtain tax relief on its capital expenditure.
For the first £50K of such expenditure the allowance is now 100% in any case. So for most companies that is the rate that will apply to all their additions with the exception of cars.

[youngsyr]

JagLover said:

youngsyr said:

So, in essence a capital allowance is a tax incentive for companies to invest in certain types of assets.

It can be for a limited range of assets, but in General the purpose of a capital allowance is to allow a company to obtain tax relief on its capital expenditure.

Not sure I agree with that, if a government wanted to allow a company to obtain tax relief on its capital expenditure, it could simply allow depreciation as a tax allowable expense.

The idea of capital allowances is to take control of how and when companies receive tax relief on their capital expenditure, hence allowing the government to target tax the relief, increase it and/or accelerate it for certain types of assets and for certain types of businesses.

It's more a political/economic tool of the government rather than just the most simple means of allowing tax relief for capital expenditure.