What are Capital Allowances?

Capital allowances are a form of tax relief available to businesses for capital expenditure on certain types of assets, primarily plant and machinery.

Instead of allowing a deduction for depreciation in the accounts, which is not permitted for tax purposes, capital allowances provide a statutory mechanism for businesses to obtain tax relief for the reduction in value of qualifying assets over time.

This helps businesses reduce their taxable profits and, consequently, their tax liabilities.

What types of assets qualify for Capital Allowances?

Common qualifying assets include:

• Fixtures in non-residential buildings (e.g., kitchen fittings, fire alarms)

• Machinery (e.g., computers, printers, lathes)

• Office equipment (e.g., desks, chairs)

• Vehicles (excluding most cars)

• Warehousing equipment (e.g., forklifts, shelving)

• Tools (e.g., ladders, drills)

• Construction equipment (e.g., excavators)

What types of Capital Allowances can my business claim?

There are several types of capital allowances, each with its own rules and rates:

1. Annual Investment Allowance (AIA):
   • The AIA is effectively a 100 per cent first-year allowance for most business expenditure on plant and machinery (excluding cars), up to a maximum annual cap, currently £1 million.
   • It is available to all businesses, regardless of size or legal form.
   • The AIA allows businesses to deduct the full cost of qualifying expenditure from their taxable profits in the year the expenditure is incurred, up to the annual limit.
   • If the chargeable period is not a full year, the allowance is proportionately adjusted.
   • Not all expenditure qualifies; there are specific exclusions, such as expenditure on cars and certain other assets.
   • The AIA must be claimed by a “qualifying person” (individual, partnership of individuals, or company) and applies to “AIA qualifying expenditure” as defined in the legislation.
2. First-Year Allowances (FYAs):
   • FYAs provide enhanced tax relief for certain types of qualifying expenditure, typically at a higher rate than the standard writing down allowance.
   • Recent changes have introduced “full expensing” (a 100 per cent FYA) for main rate plant and machinery, and a 50 per cent FYA for special rate plant and machinery.
   • Expenditure on cars is generally excluded from these FYAs.
   • FYAs are available in addition to, or instead of, the AIA, depending on the type of expenditure and the business’s choice.
   • Any expenditure not relieved by an FYA can be carried forward and relieved by writing down allowances in subsequent periods.
3. Writing Down Allowance (WDA):
   • WDA provides ongoing tax relief for the cost of plant and machinery that has not been fully relieved by AIA or FYA.
   • The allowance is given on the reducing balance of unrelieved expenditure, typically at prescribed rates (main rate or special rate, depending on the asset).
   • Expenditure is pooled (main pool, special rate pool, or single asset pool) and WDA is calculated on the pool balance each year.
4. Balancing Allowances and Charges:
   • When an asset is disposed of, a balancing adjustment may be required to ensure the total allowances given match the actual net cost to the business.
   • If the total allowances exceed the net cost, a balancing charge arises (increasing taxable profits); if less, a balancing allowance is given (reducing taxable profits).

How can Capital Allowances help businesses?

• Capital allowances reduce taxable profits, thereby lowering the amount of tax a business must pay.
• They provide an incentive for businesses to invest in new plant and machinery by accelerating tax relief.
• The availability of immediate or enhanced relief (such as AIA or full expensing) can improve cash flow and support business growth and investment.

A summary of the main Capital Allowances:

In summary, Capital Allowances are a vital tool for businesses to obtain tax relief on capital investment, supporting business growth and investment in productive assets.

If you would like to know how our experienced tax team can assist you with Capital Allowances, please contact us.