What Are Capital Allowances?

Capital allowances offer a valuable tax relief mechanism for businesses, allowing them to deduct the cost of certain business related assets from their taxable profits. This applies when a business purchases items such as machinery, equipment, and commercial vehicles which are kept and used for ongoing operations. These types of assets are collectively referred to as plant and machinery. By claiming capital allowances, businesses can reduce the amount of Corporation Tax or Income Tax they pay, depending on their structure.

Types of Capital Allowances

There are several different forms of capital allowances available, each with specific rules and benefits. One of the most commonly used is the Annual Investment Allowance, which allows businesses to deduct the full cost of qualifying plant and machinery up to a certain limit, currently set at one million pounds. This is particularly useful for businesses making significant investments in operational infrastructure.

In addition, 100 percent first-year allowances are available for certain types of environmentally beneficial assets such as electric vehicles and energy-efficient equipment. Companies may also benefit from newer schemes like full expensing and the 50 percent first-year allowance for specific purchases made after April 2023, giving firms the ability to deduct a large proportion, or even the full cost, in the year of purchase.

Special Allowances for Companies

Companies had access to the super-deduction and 50 percent special rate first-year allowance for purchases made between April 2021 and March 2023. These provided enhanced reliefs, including a deduction of up to 130 percent of the asset’s cost. These schemes were designed to stimulate business investment and have now evolved into full expensing measures for new and unused qualifying assets.

Writing Down Allowances and Mixed Use

If an asset does not qualify for first-year or full relief, or if the business has already used up its AIA limit, the cost can still be deducted gradually over time using writing down allowances. These are applied annually at a fixed percentage depending on the type of asset, with the main pool typically allowing a higher rate than the special rate pool, which is reserved for certain integral features or higher emission cars.

Where an asset is used partly for personal and partly for business purposes, only the business use proportion is eligible for relief. This is especially relevant for sole traders and partnerships who might use certain items, like laptops or vehicles, outside the business.

Cars and Vehicles

Capital allowances on cars are treated slightly differently. Unlike vans or lorries, business cars do not qualify for the Annual Investment Allowance. However, depending on the car’s CO2 emissions and whether it is new or used, a business may be eligible for either 100 percent first-year allowances or writing down allowances at the main or special rate. Zero emission new cars typically receive the most generous treatment. "Alternatively, mileage rules may sometimes be a more practical option depending on your business structure.

Other Qualifying Capital Expenditure

Beyond plant and machinery, capital allowances may also be claimed on expenditure related to intellectual property, patent rights, mineral extraction, dredging, and even certain costs related to renovating commercial buildings in specific UK areas. Structures and buildings allowances are available for eligible construction costs, although general building works and land do not qualify for plant and machinery relief.

Claiming Process and Timing

Claims are made through your tax return if you or your business is eligible. The claims may differ depending on the nature of your business. The claims would be a bit different depend your nature of business, i.e, sole trade, partnership or corporation. Consideration should be given to different business formats, the way of asset uses, timing of purchase …etc. The timing of the purchase plays a critical role in determining when the claim can be made. In most cases, the key date is either when the contract is signed or when payment becomes due, whichever falls later. For hire purchase contracts, a business can claim once the asset is brought into use, even if full payment has not been made, but interest and finance charges are excluded from the claim.

If a business chooses not to claim the full allowance in the year of purchase, perhaps due to low profits, it can defer some of the relief by using writing down allowances in later years. However, businesses that close cannot claim AIA in the final period and must instead make a balancing adjustment.

Residential Lettings and Communal Use

There are restrictions on claiming capital allowances for assets used in residential properties. The key exception is for items used in communal areas of multi, unit dwellings, such as shared entrances or hallways in blocks of flats. In such cases, fittings like lifts or furniture in common spaces may still qualify.

Find it Difficult to Handle ?

Still finding it difficult to handle and understand? You're not alone. It's not always straightforward, and the optimal use of allowances and claims can vary significantly between individuals and businesses.. Talk to professional for substantial amount and importance of the claims. It saves you more trouble and monies than you spend, there is no need to study the entire concept from ground up. Talk to your accountant and see how is the best method for your business and claim. At Elaga Accountancy our accountants will review and advise the best way of tax relief suitable for you and your businesses.

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