What are capital allowances?
In the broadest sense, capital allowances are a form of tax-approved depreciation on expenditure of a capital nature incurred by trading businesses. Depreciation, as calculated in the business accounts under GAAP, is not an allowable deduction in computing the chargeable profits of a trade because it is an item of a capital nature.
Instead, relief is given by treating the capital allowances as an expense to be deducted when arriving at the taxable trading profits. Likewise, any charges are treated as taxable receipts.
Who can claim capital allowances?
In addition to traders (self-employed individuals, partnerships or trading companies), capital allowances can also be claimed by for expenditure incurred by some property businesses and certain other qualifying activities.
What constitutes an expense for capital allowances purposes can be hard to identify, and very often expenditure is incorrectly classified as revenue (and deducted in the profit and loss account) when in substance the items are of a capital nature and therefore should be written off using capital allowances.
The reliefs and rates available have changed several times of the past 5 years, with the latest addition of a ‘super-deduction’, being enhanced rates of 50% or 130%.
See below for a table of rates.
Summary of rates ― capital allowances
The following table summarises the main capital allowances available, the rate of the allowance and if relevant any important dates or points to note.
|Super-deduction||Expenditure on new plant or machinery by companies which would normally qualify for 18% writing down allowance but excluding cars||130%||Expenditure must be incurred on or after 1 April 2021 but before 1 April 2023, only available for companies|
|Annual investment allowance||Plant and machinery, integral features and long life assets but not cars||100%||Maximum allowance £1,000,000 from 1 January 2019 to 31 December 2021, then drop to £200,000|
|Main rate pool||i) Plant and machinery expenditure on which neither AIA or first year allowances have been claimed and which is not allocated to the special rate pool
ii) New and unused cars with CO2 emissions 50g/km and below (over 50g/km but not more than 110g/km before April 2021)
iii) Second hand cars with CO2 emissions of 50g/km and below (110g/km or less before April 2021) or a second hand electric car
|18%||Single asset pools required for short life assets, ships and assets which have non-business use|
|Special rate first year allowance (SR allowance)||Special rate expenditure (ie it would normally qualify for 6% WDA) by companies on new plant or machinery||50%||Expenditure must be incurred on or after 1 April 2021 but before 1 April 2023, only available for companies|
|Special rate pool||i) Electrical systems (including lighting systems); cold water systems; space or water heating systems; powered systems of ventilation, air cooling or air purification systems; lifts, escalators or moving walkways; external solar shading
ii) Thermal insulation of an existing building
iii) Assets with a predicted useful life of at least 25 years and cost £100,000 or more
iv) New or second hand cars with CO2 emissions of more than 50g/km (more than 110g/km before April 2021)
|6%||Reduced to 6% from April 2019, previously 8%|
|First year allowances (FYAs)||i) New and unused cars with CO2 emissions of 0g/km or car is electric (50g/km or less before April 2021)
ii) Energy saving plant or machinery
iii) Environmentally beneficial plant and machinery
iv) Gas refuelling stations
v) New and unused zero-emission goods vehicles
vi) New electric vehicle charging points
vii) Expenditure on plant and machinery for use primarily in an area which is a designated assisted area in an enterprise zone
viii) Expenditure on plant and machinery for use primarily in a designated freeport tax site
|100%||i) FYAs on low emission cars available on expenditure up to 31 March 2025|
ii) and iii) FYAs on energy saving plant and machinery and environmentally beneficial plant and machinery was abolished with effect from 1 April 2020 for corporation tax and 6 April 2020 for income tax
iv) FYAs on gas refuelling stations available on expenditure up to 31 March 2025
v) FYAs on zero-emission goods vehicles available on expenditure up to 31 March 2025 for corporation tax and 5 April 2025 for income tax
vi) FYAs on new electric vehicle charging points available on expenditure up to 31 March 2023 for corporation tax and 5 April 2023 for income tax
vii) FYAs on expenditure on plant and machinery in designated assisted areas only available to companies and for eight years after area being designated or at least to 31 March 2021
viii) FYAs on plant and machinery in freeport tax sites only available to companies
|Structures and buildings allowance||i) Capital expenditure incurred on the construction or purchase of a commercial building or structure but not land
ii) Expenditure on renovation or conversion of a part of an existing building, together with expenditure on repairs incidental to the renovation or conversion
|3%/ 2%/ 10%||SL Construction must commence on or after 29 October 2018|
10% rate applies where first contract for construction is entered into on or after the date the tax site is designated and the building or structure is brought into qualifying use before 1 October 2026
You need an expert
Some of these allowances are not easily identified and tax savings are lost, where for example, a schedule of building works is carried out, and the plant & machinery or integral features are not identified and therefore the Annual Investment Allowance or Super Deduction isn’t claimed or the total cost is simply capitalised and no tax relief claimed. This is not a missed opportunity in all cases.
Moreover, where commercial buildings are being bought and sold, allowances which have been claimed must be pooled and identified to the Buyer for them to be of use, whereas if they have never been identified there can be an opportunity to release those hidden amounts.
Both of the above require specialist skills and at UHY Ross Brooke we have access to a team of specialist advisers who are tax trained and skilled Chartered Surveyors.
The combination of these skills gives those individuals a unique ability to assess the level of value attributable to items not individually identified in a costing invoice and for a report to be prepared for agreement with HMRC that the allowances can be claimed on those items.
If this is of interest to you please fill in the form to get in touch with our tax experts to discuss your capital allowance questions.