What are Capital Allowances?

So what are capital allowances, and how exact do they affect UK businesses?

When a business purchases certain qualifying assets, a capital allowance can be claimed against those assets, reducing taxable profits.

Capital allowances are offered by the UK government to encourage business investment.

However, to benefit fully from capital allowances and any other tax relief in relation to the purchase of assets, it is always recommended that the rules and requirements for making a claim are investigated, for instance:

  • What assets are eligible?
  • How are different categories of asset treated?
  • How to make a claim.

The rules that define capital allowance claims are drawn from the relevant tax legislation and legal case law. Any tax payer wishing to make a capital allowance claim must interpret these rules in the knowledge that the claim will then be processed by HMRC with their own understanding of the rules.

Capital allowances are generally available to limited companies, property companies, the self- employed, partnerships, overseas investors and private individuals, although true eligibility will always be decided by individual circumstances, for instance, whether cash basis accounting is used.

Qualifying assets

So what are capital allowances qualifying assets?

To qualify for a capital allowances claim, the asset in question must be owned. Leased and hired assets may not be claimed for.

Only certain types of asset qualify for a capital allowance claim and while there is no complete or exhaustive list of what may be claimed, the general categories include:

Plant and machinery

Plant and machinery are one of the most common types of asset claimed for under capital allowances but not always the easiest to understand.

This category covers:

  • items purchased to be used in the business, including equipment, machinery and business vehicles
  • the cost of alterations to a building so that new plant and machinery may be installed
  • the cost of demolishing existing plant and machinery
  • integral features (e.g. lifts, air conditioning systems, electrical systems) and certain fixtures (e.g. fitted kitchens and fire alarm systems)

Although alterations and demolition may qualify under capital allowances, repairs do not.

Items that are not considered plant and machinery for the purpose of capital allowance claims include leased or rented items, buildings (and the related doors, gates, gas systems and mains water systems), land and structures such as bridges or roads, and business entertainment items.

Businesses are often unaware of what is categorised as plant and machinery for the purpose of capital allowance claims, especially in the case of integral features and fixtures, and may therefore miss out on the full tax benefit available.

Research and development

Under this category, research and development carried out by a business in relation to their trade may be eligible for a capital allowance claim of 100%.

Expenditure on the provision of facilities for the purpose of research and development may also be eligible for a capital allowance claim.

Patents and know-how

Qualifying expenditure on patents and intellectual property relating to industrial techniques and processes may currently be claimed under capital allowance at 25%.

Mineral extraction and dredging

Qualifying expenditure on either of these processes may be claimed under capital allowance at 25%.

What are capital allowances rates?

Capital allowance rates vary depending on the category of asset and the circumstances of purchase, so it is essential that the taxpayer is fully aware of the correct rate to apply. The onus is always on the taxpayer to correctly calculate any capital allowances claim and therefore avoid coming under the scrutiny of HMRC.

The general capital allowance rates include:

Annual investment allowance (AIA)

Under the AIA, 100% may be claimed against the purchase of any qualifying asset up to a total amount of £1 million in any tax year.

You may not claim for cars, assets you already owned for non business use before using them within the business, or gifts made to the taxpayer or the business. However, these may be claimed under a writing down allowance.

First year allowance (FYA)

FYA is used to claim for 100% of the cost of a qualifying asset during the first year of its purchase.
You may not claim for gifts made to the taxpayer or the business, assets already owned before use in the business, assets that were not new before use in the business, assets bought for the purpose of renting out, or assets bought for use in a residential rental property.

Writing down allowance (WDA)

Where a capital allowance claim is over the AIA limit, it may be possible to claim for this excess amount through WDA.

The related assets are grouped into pools, depending on the category of assets.

The pool rates are:

  • main pool – 18%
  • special rate pool – 8%
  • single asset pool – 18% or 8% depending on the asset

Small pool write-off

Where your total capital allowance claim is in excess of the AIA limit and the value of a pool, before WDA, is less than £1,000 for a tax year, it may be advisable to make a Small Pools allowance claim. The balance of the small pool is then written off.

Enhanced capital allowances

This is a form of FYA for energy and water efficient equipment. Under this allowance, you may claim 100% relief for:

  • certain low CO2 emission cars
  • energy saving equipment on DECC energy technology product list
  • water saving equipment on DEFRA water efficient technologies product list
  • gas refuelling station plant and machinery
  • new zero emission goods vehicles
  • gas, biogas and hydrogen refuelling equipment

A capital allowances claim is made as part of your annual tax return, and generally is not subject to a time limit where the assets remain in your ownership.

However, making a capital allowances claim in the first year of purchase offers the benefit of the 100% annual investment allowance up to the £1 million yearly limit or the 100% first year allowance.

Should a capital allowances claim be made after the first year of purchase, the writing down allowance, with its reduced claim rates, will come into play.

What are capital allowances for claims on cars?

For the purpose of capital allowance claims, the definition of a car is that it is largely used privately, that it is suitable to be used privately, and that it was not manufactured to be used to transport goods.

Capital allowance claims for cars cannot be made under the annual investment allowance. The relevant capital allowance rate will depend on the year of purchase and CO2 emissions.

Cars purchased since April 2015

  • New and unused, CO2 emissions 75g/km or less – FYA 100%
  • New and unused, electric car – FYA 100%
  • New and unused, CO2 emissions between 75g/km and 130g/km – main rate allowance (MRA) 18%
  • Second hand, CO2 emissions 130g/km or less – MRA 18%
  • Second hand, electric car – MRA 18%
  • New or second hand, CO2 emissions above 130g/km – special rate allowance (SRA) 8%

Cars purchased between April 2013 and April 2015

  • New and unused, CO2 emissions 95g/km or less – FYA 100%
  • New and unused, CO2 emissions between 95g/km and 130g/km – MRA 18%
  • Second hand, CO2 emissions 130g/km or less – MRA 18%
  • Second hand, electric car – MRA 18%
  • New or second hand, CO2 emissions above 130g/km – SRA 8%

Capital allowance claims rates for cars purchased before April 2013 can be found on the HMRC website.