What are capital allowances? A commonly asked question among UK businesses. Under the capital allowances regime, capital expenditure by companies on qualifying items can be claimed and offset against taxable profits.
If you were to ask ‘what are capital allowances used for?’, they essentially provide a way for the government to incentivise investment by businesses.
In order to take advantage of tax relief on the cost of certain types of capital assets, businesses need to understand the rules, and if and how they can make a claim.
But with different qualifying items treated differently, confusion often arises for taxpayers when identifying the full extent of assets eligible for capital allowance tax relief, and applying the relevant rate of relief.
What are capital allowances? – The basics
Capital allowance rules derive from a combination of legislation and case law, which are interpreted and applied by taxpayers, and then checked by HMRC.
Capital allowances are available to the following UK taxpayers:
- Limited businesses
- Property companies
- Overseas investors
- Private individuals
- Self-employed (except where using cash basis accounting)
What are capital allowances ‘qualifying assets’?
The expenditure being claimed for must be against a particular type of asset.
You must also, generally speaking, own the asset on which you want to claim capital allowances – i.e. it’s not hired or leased.
Rather unhelpfully for businesses, there is no single definitive, exhaustive list of qualifying expenditure.
It requires an in-depth understanding of both legislation and case law to identify the full extent of expenditure that qualifies for capital allowance. There are however a number of general headings which the expenditure must fall within:
- Plant and machinery – Relief available on integral features of a building; certain types of fixtures; the costs of demolishing plant and machinery; alterations to a building to install other plant and machinery, but not repairs.
- Research and development expenditure – If you incur capital expenditure on research and development (R&D) related to your (current or imminent) trade, the expenditure could qualify for a 100% allowance.
- Patent rights and know-how – Currently set at 25% relief on the balance.
- Mineral extraction & dredging – Currently given at 25% on certain expenditure on the acquisition of minerals or rights over them, and pre-trading exploration expenditure.
Plant and machinery is by far the most used of the categories, but still the ‘plant’ element continues to cause great confusion – largely because it is dictated by the specific trade of each business.
Integral features could include:
- lifts, escalators and moving walkways
- space and water heating systems
- air-conditioning and air cooling systems
- hot and cold water systems (but not toilet and kitchen facilities)
- electrical systems, including lighting systems
- external solar shading
You can also claim for fixtures, e.g.:
- fitted kitchens
- bathroom suites
- fire alarm
- CCTV systems
Companies often do not appreciate the extent to which they can claim plant and machinery allowances for fixtures and equipment, for example in a commercial building they are buying, or when starting up a new business.
Conversely, there are plant and machinery you cannot claim capital allowances on:
- things you lease – you must own them
- buildings, including doors, gates, shutters, mains water and gas systems
- land and structures, e.g. bridges, roads, docks
- items used only for business entertainment, e.g. a yacht or karaoke machine
What are capital allowances rates for tax year 2017/2018?
The calculations needed to arrive at the correct capital allowance figures are the responsibility of the taxpayer – which can be overwhelming. As with anything HMRC, there is no room for error if you want to avoid scrutiny.
Capital allowances are calculated on the basis of relevant rates of relief on the cost of qualifying expenditure applied to taxable profits.
The main types of allowance include:
- Annual investment allowance (“AIA”): 100% Claim for eligible assets up to an annual value cap of £200,000.
- First year allowance (“FYA”): 100%
- Writing down allowance (“WDA”): Items to be grouped into pools:
- main pool e.g. plant and machinery – 18%
- special rate pool, applies once AIA exceeded on integral features, long life items and thermal insulation to a building – 8%
- single asset pools with a rate of 18% or 8% depending on the item
- Small pool write-off: 100%
- Enhanced capital allowances: 100% Applicable to energy saving and environmentally beneficial plant and machinery.
You make a claim yourself in your tax return, usually 12 months after the 31 January filing deadline for the return. However, providing you still own the property and the fixtures in the tax year you submit a claim, there is no time limit to make a capital allowances claim.
Claiming in the year you made the purchase should allow you to take advantage of Annual Investment Allowance, at 100%, up to the £200,000 annual limit, or under the First Year Allowance. Claiming after the year of purchase defaults to Writing Down Allowances.
What are capital allowances on cars?
Cars are treated under different rates within the capital allowances regime. The rates for 2017-18 are as follows:
|First Year Allowance for electric cars or if CO2 emissions are 75g/km or lower||100%|
|First Year Allowance for electric cars or if CO2 emissions are 95g/km or lower||100%|
|First Year Allowance for electric cars or if CO2 emissions are 110g/km or lower||100%|
|Writing Down Allowance if CO2 emissions exceed 75g/km but do not exceed 130g/km||18%|
|Writing Down Allowance if CO2 emissions exceed 95g/km but do not exceed 130g/km||18%|
|Writing Down Allowance if CO2 emissions exceed 110g/km but do not exceed 160g/km||18%|
|Writing Down Allowance if CO2 emissions exceed 130g/km||8%|
|Writing Down Allowance if CO2 emissions exceed 160g/km||8%|
Emissions thresholds will be reduced to 50g/km and 110g/km for expenditure on or after 1 April 2018. Read more about the rules on claiming capital allowances on cars.
Enterprise Tax Consultants can assist
As specialists in tax, we can also advise on the many tax incentives that may be available to your business, including capital allowances, in the wider context of meeting your commercial goals.
The capital allowances regime comprises a substantial body of rules which are liable to frequent change in relation to qualifying expenditure, relevant rates for claim and threshold levels.
We can advise on the tax implications of different methods of acquiring assets, for example outright purchase or leasing, and on the best timing of your purchase or disposal.
We can also help where allowances have been missed in previous years, for example to when the business started or when a commercial property was purchased for the business.
Our services include:
- Capital allowances
- Enhanced capital allowances
- Capital allowances on cars
- Corporate tax
- Property tax
For more information, get in touch with one of our specialist tax advisers.