Capital Allowances
What are capital allowances?
Capital allowances in the UK refer to the tax relief that businesses can claim on certain capital expenditure. When a company invests in assets like machinery, equipment, or commercial property, they can deduct a portion of the cost from their taxable profits over time. This reduces their overall tax liability, providing a financial incentive for business growth and investment.
The UK government sets specific rates for different asset categories, determining how much can be claimed each year. Capital allowances help companies manage their tax burden, encourage capital investment, and stimulate economic growth by freeing up funds for reinvestment in their operations. Understanding and maximising these allowances is crucial for efficient tax planning and financial management.
Investment in R&D often goes hand in hand with expenditure on capital assets such as commercial property and equipment. So considering the two together makes sense for innovative businesses.
Who is eligible for capital allowances?
Capital allowances can be accessed by property occupiers and investors.
If you’ve recently allocated capital funds towards the purchase, building, or improvement of commercial properties in your portfolio, and you are an income or corporate taxpaying entity, there’s a high likelihood that you can leverage capital allowance benefits.
How do capital allowances work?
Capital allowances are not granted automatically, they must be claimed within your tax return. There is no time limit when claiming capital allowances, as long as the asset you are claiming for is still owned and used by the business.
When acquiring a property, or looking to embark on a refurbishment, it is important to review the rates and allowances available to help reduce the tax burden for your project.
Matching your expenditure to the correct capital allowance.
There are three different types of asset classes, each with their own rate of relief for which there is no limit to the amount you can claim. The government offers enhanced rates for some types of expenditure.
What are the different types of capital allowance?
There are three different types of accelerated allowances:
Annual investment allowance (AIA)
The annual investment allowance (AIA) is a UK tax provision that permits businesses to deduct a significant portion of their eligible capital expenditures from taxable profits in the year of purchase. As of September 2021, the AIA allows up to £1 million for investments made in new equipment, plant and machinery.
First year allowances (FYA)
First-year capital allowances are designed to encourage businesses to invest in energy-efficient and environmentally beneficial equipment and technologies. These allowances enable companies to deduct the entire cost of qualifying assets from their taxable profits in the year of purchase, providing a significant upfront tax benefit.
First year allowances typically cover assets that meet strict energy-saving and environmental criteria specified by the government. By offering this incentive, the government aims to reduce carbon emissions, promote sustainability, and encourage businesses to adopt more environmentally friendly practices.
Full expensing
Full expensing for general pool items represents a 100% initial-year allowance, enabling companies to deduct from their taxable profits an amount equal to 100% of their qualifying expenditure on general pool assets in the year when the expense is incurred.
To be eligible, the expenditure must be associated with the acquisition of general pool equipment and machinery on or after April 1 2023. However, several conditions must be satisfied, such as the equipment and machinery being brand-new and unused, not being a car, not being a gift to the company, and not being acquired for leasing to others (although corporate landlords may receive benefits for core equipment and machinery within a leased property).
Full expensing for special rate pool items attracts a 50% first year allowance for companies who spend money on qualifying assets within their properties such as air-conditioning, electrics and lighting.
The remaining 50% of expenditure attracts the usual writing down allowance annually through the usual pooling process.