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Topic: Elections and claims

capital allowances short-life asset election
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Capital allowances short-life asset election

Capital allowances short-life asset election

Tax relief on the cost of equipment you buy for your business is spread over decades unless your purchases are covered by the annual investment allowance. The good news is you can accelerate this dramatically with a simple election.

When can you use an election?

Businesses are allowed tax relief for the cost of machinery and equipment. Each purchase is added to a pool of expenditure and a writing down allowance (WDA) of either 18% or 8% (6% from April 2019), depending on the type of equipment, allowed on the balance. This means you’ll be claiming WDAs8on the cost of equipment for many years after it has been scrapped or sold.

To speed up tax relief for certain types of equipment (cars are excluded) you expect to keep for eight or fewer years, you can, instead of pooling the cost, elect to have WDAs worked out for each purchase or class of purchases separately. This is called a Short-Life Asset Election. When you sell or scrap the equipment within eight years, you’ll be entitled to tax relief for the balance of any of cost (see example).

Note. Where the total expenditure on equipment etc. is less than the annual investment allowance (AIA), a 100% tax deduction can be claimed for this in the financial year in which the purchase is made and therefore an election isn’t needed.

Example

On 31 May 2018 Acom purchased a file server for £6,000. It has used its AIA against other expenditure in the same financial year. Acom makes an election for the server which it submits to HMRC with its accounts for the financial year to 31 December 2018. It sells the server on 31 August 2020 for £1,000. The tax allowances it claims are as follows:

 

Year ended 31 December 2018

 

Qualifying expenditure      £6,000

WDA 2018  - 18%   (£1,080)

Written down value (WDV)   £4,920

 

Year ended 31 December 2019

 

WDA 2019 - 18%   (£   886)

Written down value (WDV)    £4,034

 

Year ended 31 December 2020

Sold     (£1,000)

Balancing tax allowance    £3,034

 

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