What Are Capital Allowances?
A capital allowance is the tax equivalent of depreciation in the UK.
Depreciation is generally not allowed for tax purposes and therefore any depreciation in the accounts must be added back to increase taxable profits. Instead, you may be able to claim a capital allowance. Capital allowances are HMRC’s way of making tax fair and equitable when it comes to calculating taxable profits.
What Are Capital Allowances Available On?
Most capital allowances are concerned with plant and machinery. The plant and machinery must be owned by the business and not under lease.
Machinery is any device with moving parts. Plant is equipment which a person uses to conduct their business. It does not include the premises in which a person conducts their business but might include the equipment within it. Plant must have an expected life of at least 2 years and be required for the functions of the business so would include items such as computers, laptops, printers, phones, tablets, tool stations and any large asset that is used in the business.
Some small items, such as replacement loose tools, or computer peripherals of say £100 or less may be regarded as revenue expenditure. This means that you are able to claim tax relief immediately and not over many years.
Capital allowances are also available on integral features of a building (elevators, air conditioning for example). It can also be claimed on the costs of construction or renovation of a structure.
What Types of Capital Allowances Are There?
Annual Investment Allowance
Annual Investment Allowance
Annual Investment Allowance
There is an annual investment allowance (AIA) which may be claimed against most forms of allowable plant and machinery. This means that a business (remember this might be a limited company, partnership or sole trader) can deduct the full value of an item that qualifies for annual investment allowance (AIA) from profits before tax.
The allowance is £1 million per annum.
AIA cannot be claimed on:
- Cars;
- Items given to the business or;
- Items which were previously used for personal use but then used for business use.
First Year Allowance
Annual Investment Allowance
Annual Investment Allowance
First-year allowances are ‘enhanced capital allowances’ to encourage business owners to invest in energy efficient equipment. They normally allow 100% of the cost to be deducted in the year the expenditure was incurred.
The first year allowance is seperate to the annual investment allowance and can be claimed on the following as long as they are new and unused:
- Electric cars and cars with zero CO2 emissions;
- Equipment for electric vehicle charging points;
- Zero-emission goods vehicles
Written Down Allowances
Annual Investment Allowance
Structures & Buildings Allowance
When annual investment allowances or first year allowances cannot be utilised for an asset, then writing down allowances can be used. There are 3 types of writing down allowances:
- Main pool with a rate of 18% – most plant and machinery
- Special rate pool with a rate of 6% – some long life assets or higher emission cars
- Single asset pools with a rate of 6% or 18% - these are for assets with a useful life of greater than 25 years or certain cars which have a both a business and non business use.
Writing down allowances are given on a reducing balance basis. When an asset is disposed off, the value of the proceeds is taken off from the pool the asset sits in.
Structures & Buildings Allowance
Structures & Buildings Allowance
Structures & Buildings Allowance
This is available on certain expenditure incurred in constructing or renovating a structure and the allowance is given at 3% per year on a reducing balance basis.
Costs which will NOT qualify for this allowance include:
- Purchase of land,
- Construction of residential buildings,
- Structures to be used for non qualifying activities.
Super Deduction
Structures & Buildings Allowance
Super Deduction
This is an allowance available on the purchase of new plant and machinery between 1 April 2021 and 31 March 2023 at a rate of 130%.
The Super Deduction is available only to companies, at a rate of 130% for main rate assets, 50% for special rate assets (i.e. Fixtures and Integral Features), or 100% for assets used partly for ring-fenced trades and partly for qualifying trades (on apportionment). The Super Deduction is available for qualifying expenditure incurred between 1 April 2021 and 31 March 2023. This deduction is no longer available for tax year 2023/24.
Capital Allowances Qualifying Conditions Summary
Main rate assets - these are most plant and machinery assets excluding the assets falling under the special rate. The main rate is currently 18%.
Special rate assets - these are plant and machinery assets and the current rate is 6%. The following assets would fall under this rate:
- Business cars with CO2 emissions above the current threshold (see section section below);
- Items considered to have a long life usage in the business (useful life of at least 25 years);
- Integral features (e.g. parts of a building considered as essential or intrinsic);
- The thermal insulation inside, or part of, buildings.
New disposal rules - If you dispose of or sell an asset on which you’ve claimed super-deduction or special rate first year allowances, you must work out a balancing charge and add this to your taxable profits.
What Are The Rules Around Cars And Capital Allowances?
Capital allowances on cars operate under different rules to capital expenditure on plant and machinery.
Whereas in most cases you can deduct the full cost of these items from your profits before tax using the annual investment allowance (AIA), cars do not qualify for AIA. First year allowances can only be claimed on cars which are newly purchased AND electric or have zero C02 emissions.
For the purposes of capital allowances, a car is a vehicle that is suitable for private use that was not built for transporting goods.
You can claim capital allowances on new and second-hand cars you buy and use in your business using ‘writing down allowances’.
When purchasing a new or second-hand car, the capital allowances available for tax purposes are very specific. The percentage deductible depends on the year the car was purchased and the CO2 emissions of the vehicle.
Higher emission cars attract a writing down allowance at the main rate of 18% or at the special rate of 8% depending on their emission figures and when they were first registered:
Main rate pool - car first purchased before 1 April 2018 and a C02 emission level of C02 emissions of 130g/km or less, cars first purchased after 1 April 2018 but before 1 April 2021 with a C02 emissions of 110g/km or less and cars purchased from 1 April 2021 with a C02 emissions of 50g/km or less.
Special rate pool - car first purchased before 1 April 2018 and a C02 emission level of C02 emissions of over 130g/km, cars first purchased after 1 April 2018 but before 1 April 2021 with a C02 emissions of over 110g/km and and cars purchased from 1 April 2021 with a C02 emissions of more than 50g/km.
Cars that are used for both priavte and business use should be placed in a single asset pool with relief only given on the business usage element of the car.
Employees & Capital Allownaces On Cars
Employees cannot claim capital allowances on cars they have purchased and use for business travel. They should instead use the milage allowance.
Sole Traders & Capiral Allowance On Cars
A sole trader cannot claim capital allowance on a car they use for business if they are already claiming milage allowance.