As a limited company owner is it extremely important that you understand the difference between your personal assets and the limited company assets. You and your company are taxed independently of each other and are subject to differing legislation, so establishing ownership of assets used within the business activities is essential for correct tax treatment.
There are a few questions you can ask to deem ownership of an asset:
- Is the asset used to create future economic value within the business?
- Was the asset paid for by the company, or is the company liable for the cost?
- Has the limited company been invoiced for the item, or is there any ownership paperwork (such as a V5 document for a vehicle) that states the owner as being the limited company?
If you can answer yes to the above questions then the asset is owned by the limited company, and hence needs to be taxed in line with the capital allowance rules.
Accounting for Assets
When a limited company purchases items for use within the business (for example materials or stationery), these are entirely expensed through the profit and loss account. These expenses therefore reduce the company profit and consequently the corporation tax bill.
When a limited company purchases an asset, the cost is not expensed through the profit and loss account, but instead held on the balance sheet as a fixed asset. Each year the asset will be depreciated in accordance with the “useful economic life” of the asset as deemed appropriate by the company directors.
For taxation purposes all company assets are split into “pools.” These pools are then charged a tax deductable writing down allowance based on which pool they fall into.
The four main types of capital allowance pool and their rates are:
|General pool – Annual Investment Allowance||100%|
|Special rate pool||8%|
|Single asset pool||8% or 18% depending on the item|
Annual Investment Allowance (AIA)
As I’m sure you will agree the item that sticks out on the above list is the 100% listed next to annual investment allowance. This is correct and not a typo, you can in fact claim 100% of the cost of assets against your tax bill in the year of purchase so long as they meet the criteria under this legislation.
- The total value of qualifying assets do not exceed the AIA limit (currently £500k until 31 December 2015, and then £200k from 1 January 2016)
- The assets are wholly owned by the business and are used exclusively by the business.
- The assets were purchased by the company during the reporting year and were not owned by the director prior to being used within the business.
- The assets were not gifted to the company.
Company cars do not qualify for AIA. The writing down allowance rates for company cars depends on the CO2 emissions of that car.
For cars purchased after 1 April 2015 the rates are as follows:
|New and unused, CO2 emissions are 75g/km or less (or car is electric)||100%|
|New and unused, CO2 emissions are between 75g/km and 130g/km||18%|
|Second hand, CO2 emissions are 130g/km or less (or car is electric)||18%|
|New or second hand, CO2 emissions are above 130g/km||8%|
Essentially what I hope you take away from this article is that tax planning is essential to make the most of the available tax allowances. Consult with your accountant before making any large asset purchases, and especially if you are considering buying a vehicle. Don’t pay more tax than you have to!