A capital allowance is an expenditure that your business can claim against its taxable profit. You can claim capital allowances on most assets purchased for use in your business, such as equipment, machinery and business vehicles – all known as plant and machinery. Depending on the asset, you can claim for the full or partial value, and whether the allowance is deductible in one year or over several.
What are capital allowances claimed on?
The main thing to establish is whether your expenditure is capital or revenue in nature. If an asset has been replaced in its entirety and there is a significant improvement, it is likely to be capital. See HMRC’s Business Income Manual BIM35000 for HMRC guidance and also CA22340/50 for guidance on replacing integral fixtures.
What are the common types of capital allowance?
The most commonly used allowances are the annual investment allowance (AIA) and the first-year allowance.
When used solely for business purposes, the AIA allows you to deduct the full value of most items up to a limit of £1million annually (from January 2019). This tax deduction is claimed during the same tax year as the item is bought. Most plant and machinery can be claimed under the AIA except cars, gifts to the business, and any items purchased before they were used in the company.
First Year Allowance
Also known as ‘enhanced capital allowance’, the first year allowance is available in addition to the standard AIA amount for certain assets when purchased in the first year of business. Energy-efficient and water-efficient equipment (including some new cars with low CO2 emissions, equipment, and new zero-emissions goods vehicles) are the types of items eligible for the first year allowance.
Writing Down Allowance (WDA)
If you do not claim all the AIA or first-year allowances you’re entitled to, you can claim part of the cost in the next accounting period using writing down allowances. This can be used for assets that are not eligible for other deductions, like cars, gifts, or pre-owned items. The percentage of the value that may be claimed is based on the type of item, and the rate deductible for business cars is dependent on the level of CO2 emissions.
What capital expenditure does not qualify for Capital Allowances?
Most capital expenditure undertaken by a trading entity will qualify for allowances if what you have installed performs a function. The main exception is expenditure on land and the fabric of buildings which will not qualify. Also, if you are renting out accommodation, you will not be able to claim capital allowances other than on Furnished Holiday Lets. Commercial property landlords may claim allowances.
New Structure and Buildings Allowance
The new Structure and Buildings Allowance (SBA) gives a flat rate of 2% allowance for the cost of non-residential buildings like shops, offices, factories, warehouses, hotels, care homes, etc. Expenditure on land, planning costs and parts of a structure which can qualify as plant and machinery (and thus attract AIA and WDA) will not qualify for this new SBA. There will be no clawback of allowances if the building is sold, and the new owner will inherit the flat rate 2% allowance based on the original cost for the remainder of the initial 50-year term.
The new SBA applies to building works where the contract is entered into, on, or after 29th October 2018. It is important to be aware of this new relief and make sufficient enquiries are made if you are buying a commercial property. Unlike capital allowances, which give, effectively, double relief on the qualifying expenditure, CGT base cost is reduced by SBA claimed.
Older buildings and improvements will not qualify for SBA nor capital allowances. However, it may be possible to make a partial capital allowances claim in relation to commercial property held. We have made substantial tax claims for clients in the past, so if you hold commercial property, please do speak to us to establish whether we may be able to establish a claim for you.
Capital allowances can be a minefield to navigate. At CRM we love getting to grips with every detail of capital allowances and pride ourselves on offering the most straightforward, helpful advice in this tricky area. Please contact the expert team if you’d like to understand more, on 01865 379272 or get in touch via our website.