What are capital assets and why are they important?

Even if it’s just a laptop, a desk and chair, your business needs equipment to operate.

Many small businesses end up using a great deal of equipment, from office furniture to plant and machinery.

Whatever you use, these pieces of kit are so pivotal to the running of your business that they have special tax treatment.

They are known as ‘capital assets’.

What are capital assets and how do they affect your business tax?

Capital assets (sometimes called fixed assets) are any significant pieces of equipment used for longer than a year and not sold as a regular part of your operations.

For example, if you renovate camper vans then each individual van is not a capital asset, but your own van and tools would be.

They are called capital assets because you have to spend money on them as part of your operations, but they are not part of your day-to-day costs like heating and power.

They are also ‘fixed’ because you use them regularly over the long-term. To qualify as a capital asset, the item must be owned mostly for its contribution to your business.

If you own a car that functions as both your personal car and the one you use to visit clients, it may not qualify (depending on how the use is shared out).

The size of your company is also a factor when it comes to whether or not something is defined as a capital asset.

For a small business, spending £600 on a computer could be a significant enough transaction to qualify it as a capital asset.

However, for a larger company with a big workforce and a higher employee turnover, this kind of purchase would be considered a regular running cost.

Why is it important to identify your capital assets?

The main reason to get to grips with your capital assets is that they are treated differently from other assets, both in terms of tax and in your accounts.

Failure to treat capital assets correctly may mean that you pay more tax than you have to, or conversely it may prompt an investigation from HMRC.

How do I approach capital asset management?

Due to their long-term nature, capital assets need to go on your balance sheet. This creates a challenge, because over the years that you own the asset, its value will decrease.

This is called depreciation, and has to be considered in the accounting process.

The fact that you are regularly using the asset means this depreciation can be thought of as occurring in a regular fashion. Every year, part of the asset’s value needs to be deducted from your business’ profits.

You can work out the rate of depreciation as either a percentage of the asset’s total cost, or as a percentage of its value at the start of the year.

While depreciation is not tax-deductible, businesses should use capital allowances such as the annual investment allowance (AIA) or full expensing for tax relief purposes. Capital allowances effectively replace depreciation for tax reporting, aligning with current HMRC rules​.

Is there tax relief available for capital assets?

The depreciation in the value of your capital assets is also important for the way they are treated for tax purposes.

HMRC doesn’t consider depreciation to be an allowable expense, so although it must be removed from your profit, it needs to be added back when working out how much tax you need to pay.

However, HMRC does grant tax relief on some of your capital assets – which is good, but adds yet another layer of administration.

Tax relief on capital assets comes in the form of capital allowances.

What is capital allowance?

Capital allowances provide tax relief for your capital expenditure. You can claim capital allowances on assets you buy for your business, including your capital assets.

The Annual Investment Allowance (AIA) currently allows businesses to spend up to £1 million a year on new assets and then deduct that cost from their taxable profits.

You can’t claim AIA on some assets, including cars, assets introduced from another business (e.g. using the same computer) and personal assets you happen also to use in your business.

There is also a 100% first-year allowance that means you can claim back tax on an asset in the year you purchase it.

If you buy an asset that qualifies for 100% first-year allowances, you can deduct the full cost from your profits before tax.

You can claim 100% first-year allowances in addition to the Annual Investment Allowance (AIA) as long as you do not claim both for the same expenditure.

You can claim ‘enhanced capital allowances’ for specific equipment which must be new and unused:

If you’re a company investing in plant or machinery, you may also be eligible for additional schemes, such as full expensing (which allows a 100% deduction on most plant and machinery) or the 50% first-year allowance for special rate assets.

However, you cannot claim more than one allowance for the same expenditure.

Here are some updates from the Spring Finance Bill:

1. Full expensing made permanent: From April 2023, businesses can claim a 100% first-year deduction on qualifying plant and machinery expenditures, permanently reducing the cost of such investments​.
2. Abolition of multiple dwellings relief (MDR): MDR under stamp duty land tax (SDLT) was abolished from June 2024, but transitional rules allow claims for contracts exchanged by 6 March 2024.
3. Consultation on capital allowances: A review of the capital allowances regime is underway to assess possible reforms following the permanent full expensing measure​.
4. Extended tax reliefs for creative sectors: Enhanced tax reliefs for theatre, orchestra, and museum exhibitions are extended permanently from April 2025​.
5. Increased economic crime levy: From the 2024-25 tax year, the levy for large businesses with over £1 billion revenue will increase, reflecting ongoing efforts to combat economic crime​.

For more details, businesses should check the Spring Finance Bill updates or consult an accountant.

Get expert financial advice

Understanding what qualifies as a capital asset and how to manage it effectively is crucial for any business.

By properly identifying and accounting for your capital assets, as well as strategically using available allowances, you can significantly reduce your taxable profits and ensure compliance with HMRC regulations.

Staying informed about the latest tax rules will help your business maximise tax relief opportunities and avoid unnecessary liabilities.

Let Unbiased match you with an accountant or financial adviser for expert financial advice who can help you navigate the complexities of capital asset management, from identifying eligible assets to optimising your tax allowances and planning for future investments.