What are Capital Allowances?

What are capital allowances, and how do they affect UK businesses?

Capital allowances are offered by the UK government to encourage business investment. When a business purchases certain qualifying assets, capital allowances can be claimed, thereby allowing the business to write off the cost of those assets against taxable income.

Capital allowances are generally available to limited companies, property companies, the self-employed, partnerships, overseas investors and private individuals.

To benefit fully from capital allowances and any other tax relief in relation to the purchase of assets requires full consideration of a company’s tax position and of the key elements of capital allowances:

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

Qualifying assets

To qualify for a capital allowances claim, the asset in question must be owned by the business; leased and hired assets cannot 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. The onus is on the taxpayer to correctly calculate any capital allowances claim and to 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.

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 – 6%
  • single asset pool – 18% or 6% 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

Enhanced capital allowances, from April 2020, apply only to businesses in government-designated Enterprise Zones.

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.

What are Capital Allowances? 2
Taxoo
Taxoo is a leading business and financial resource aimed at supporting businesses by providing reliable information and resources that can save business owners time and money.

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