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Dear tax man, Please excuse my writing!

Writing down allowances. What are they? Do I need to care?

The answer to that second question will depend on whether you have reviewed our previous weeks’ post about assets and whether you have spent over the Annual Investment Allowance, or other items that cannot be claimed under AIA. Check that out here to see if you should care. If you don’t, if I am honest, I wouldn’t bother myself 😜 spend an extra 5 minutes on our Instagram page 😉

Now… Writing down allowances is when you deduct a percentage of the value of an item from your profits each year. The percentage you deduct depends on the time.

Most times, the value you use is what you paid for the item, otherwise you should use the market value.

Then once you have the value, you must group the items into ‘pools’ that will determine what percentage rate they qualify for. The 3 types of pools are:

MAIN (18%), SPECIAL RATE (6%) & SINGLE ASSET (18% or 6% depending)

Main Pool – All assets that are not classified in either of the other pools.

Special Rate Pool – assets that are parts of a building considered ‘integral’ (but not the building itself), assets with a long life (at least 25 years from new) where the total amount of these adds up to £100,000 or more (if the total amount is less than £100,000 these assets can be put into the main rate), thermal insulation of buildings, cars with CO2 emissions over a certain threshold (to check this visit HMRC)

Single Asset Pool – You may have separate pools for assets that (1) have a short life (or wont keep for a long time), (2) assets you use outside your business & (3) a short life asset (how you determine short life is up to you) but there are certain things you cannot class as short life – cars, items used outside business, special rate items and large numbers of similar items.

How much you can claim

You will have opening and closing balances from previous years and you treat each pool separately.

1. Take the closing balance of last years (or accounting period) pools

2. Add the value of anything you have bought or been given in the year, only include VAT if you are not VAT registered

3. Deduct the value of anything sold or disposed of

4. Work out how much you can claim using the correct rate for the correct pool

5. Deduct this amount you can claim (4) from the pool (figure after step 3) to get the new closing balance

Helpful example

1. The opening balance in your main pool is £9,000.

2. You bought a machine worth £1,200. The total of this pool is now £10,200.

3. You sold a desk worth £200. The total is now £10,000.

4. The amount you can claim for the main pool is 18% of £10,000 = £1,800.

5. The rest (£10,000 - £1,800 = £8,200) is your closing balance. This amount is carried over and is your opening balance for next year.

If you have less than £1,000 worth of assets in your main or special rate pools, you can claim the full amount rather than a percentage. This is called a small pools allowance.

Both the £100,000 long life assets limit and the £1,000 small pools allowance are pro rata.

So, if your accounting period is less than 12 months, you will need to calculate your new limits.

For example; for a 9 month period your long life assets limit is now £100,000 /12x9 = £75,000 and you small pools allowance is £1,000 /12x9 = £750.

I told you not to bother if you didn’t need to 😉

But if this was what you were looking for, I really hope it was useful to you. If there is something that is still very confusing or wasn’t explained well enough, because I am told I have a habit of doing that, please feel free to contact us, dm us on social media or book in a discovery call if you think you might want to work with us!

All of the above was correct at the time of posting (Feb 2021).

I hope you found this interesting if nothing else. Apologies for drawing you in with an Olly Murs pun 😉

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