What Are Capital Allowances?
Tax relief available to businesses
Capital allowances are a way for businesses to claim tax relief on capital expenditure. This is money spent on assets that are intended for long-term use in the business. This could include machinery, equipment, or building improvements. First-year allowances are available that may allow the full qualifying expenditure to be deducted in an open tax return, or if the expenditure is historic businesses can claim a portion of the expenditure over several years.
In essence, capital allowances reduce the taxable profits of a business, which means you pay less tax. The amount you can claim and the timing of the relief depend on the type of asset and the allowance rate that applies.
Qualifying Activities for Capital Allowances
Activities that relate to the operation of a business
To claim capital allowances, the expenditure must relate to certain qualifying activities. These activities typically involve the operation of a business and cover a wide range of sectors. The following are examples of activities that can qualify:
Trade or Profession
The most common qualifying activity is the operation of a trade or profession. This covers a wide range of businesses, from sole traders and small enterprises to large corporations. Whether you run a retail shop, an accountancy practice, or a manufacturing plant. The assets you purchase for use in your trade may qualify for capital allowances.
Property Rental Business
If you own and rent out commercial properties, such as office spaces or warehouses, you may claim capital allowances on certain expenditures. For example, if you purchase a new air-conditioning system for a commercial property, it may qualify for the Annual Investment Allowance (AIA).
Plant and Machinery
One of the largest categories for capital allowances is plant and machinery. This includes a wide range of assets, such as:
- Equipment and tools
- Office furniture
- Computers and IT systems
The majority of businesses will have at least some qualifying plant and machinery. Making this a crucial area for claiming capital allowances.
Integral Features of a Building
Certain parts of a building that are integral to its function may also qualify for capital allowances. These are often referred to as “integral features” and include:
- Heating systems
- Electrical systems
- Lifts, escalators, and moving walkways
What Doesn’t Qualify?
There are some key exclusions
While the list of qualifying activities is broad, there are also some key exclusions to be aware of. For instance, you cannot claim capital allowances on land (although significant tax relief can be available for costs spent on remediating contaminated land i.e. Land Remediation Tax Relief). Also, items bought and sold as part of your trading stock do not qualify. These are considered part of your business’s normal operating expenses.
Types of Capital Allowances
Different types of capital allowances apply to various assets and expenditures
The Annual Investment Allowance (AIA) allows you to deduct the full cost of qualifying assets up to a certain limit and this is currently £1 million per year. There are also Writing Down Allowances (WDA), which let you claim a percentage of the asset’s value each year. First Year Allowances (FYA), which offer full relief on certain types of investments in their first year. There is also Structures and Buildings Allowance (SBA) which allows allowances to be claimed on most types of expenditure that can’t be claimed as other forms of capital allowances. SBA is currently only claimable at a rate of 3% per annum but it can still provide a big annual tax saving if. For example, you lease a property and perform an expensive fit-out. It should be noted, however, that if you own the property there is a potential clawback of this allowance when the property is sold.
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Latest News
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5 December 2024What Are Qualifying Activities for Capital Allowances?
Capital allowances are a key tax relief available to businesses for qualifying activities. They allow businesses to deduct the cost of certain capital expenditures related to these activities from their taxable profits, reducing their overall tax burden. However, not all purchases or investments qualify.... -
3 December 2024How Do CARS Assess Capital Allowances?
At CARS, we assess capital allowances and offer businesses and property owners a significant opportunity to reduce their tax liabilities by deducting qualifying capital expenditures. Here at Capital Allowance Review Service (CARS), we provide a thorough process to optimise these claims. Our goal is to...
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