Tax base

Capital allowances

In many countries depreciations are used for tax purposes. In the UK, depreciation is what is shown in the accounts, capital allowances are shown only on the tax computation. The depreciation figures have no effect on the tax situation, all the amounts are added back (ignored). A Capital allowance refers to sums of money a UK business can deduct from the overall corporate or income tax on its profits. There are different rules for different expenditures.

Types of capital allowances for plant and machinery

You can claim different amounts, depending on which capital allowance you use.

The capital allowances (also known as plant and machinery allowances) are:

- annual investment allowance (AIA) - you can claim up to £1 million on certain plant and machinery
- 100% first year allowances - you can claim the full amount for certain plant and machinery in the year that it was bought
- writing down allowances - you can claim these if your plant and machinery does not qualify for AIA or you’ve already claimed the maximum amount

If an item qualifies for more than one capital allowance, you can choose which one to use.

Director's tax deductible expenses

Directors can only get tax relief for business expenses they have paid for and if they were for the cost of either:

• travelling they had to do in doing their job
• other expenses directors had to pay in doing their job - and which related only to doing their job. For example directors cannot claim for the cost of ordinary clothing that they wear to work because it is not a cost which only relates to doing their job – directors need to wear clothing both inside and outside of work.