A Guide to Capital Allowances
A large number of businesses in the UK consistently pay too much tax because they do not understand how much of their capital expenditure qualifies for capital allowances. At Monetta, we regularly help clients maximise their claim by identifying all of the available reliefs which are extremely varied and come in different forms.
While some examples of qualifying expenditure are simple to work out, for others, such as those involving buildings and/or building works, the process can be more complicated. In this guide, we explain everything you need to know about capital allowances and how your business can stand to benefit.
What are capital allowances?
Expenses incurred by your business are usually categorised as a revenue (trading) expenses or capital expenditure. Usually, if an investment has a lasting benefit for your business, it will be classified as capital expenditure.
Capital allowances are one way of obtaining tax relief on some types of capital expenditure. They are treated the same as another business expense and so reduce your taxable profit within your basis period.
The three main forms of capital allowance are:
- Plant & machinery allowances;
- Integral features; and
- Structures & buildings allowances.
What qualifies for capital allowances?
Any assets that are purchased for business purposes can be included in a capital allowance claim. These include things like IT equipment, plant and machinery and commercial vehicles. Due to the prevalence of such items, for many businesses they are often relatively simple to identify.
However, it is often much more difficult to identify qualifying expenditure on property and buildings that may be eligible for a capital allowance claim. Examples of expenditure that may qualify are:
- Air conditioning;
- Alarm systems;
- Electrical systems;
- Fire safety systems;
- Heating systems;
- Lifts; and
- Sanitary fittings.
Does all expenditure qualify for capital allowances?
No. Generally, you must own the asset on which the capital allowance is being claimed, meaning if you have hired or leased the asset, your claim will not be eligible. You may, however, obtain tax relief on the rental costs as a revenue expense.
Cost of land, certain professional fees and landscaping works would usually not qualify for any form of capital allowances. The remaining expenditure could qualify for one of the three mains forms of capital allowance depending on factors including the type of expenditure incurred and the trade of the business.
Claiming capital allowances on the purchase of a property
Many businesses choose to purchase the property they operate from in which case, the property should be included as a fixed asset in the accounts. Capital allowances may be available on the purchase of second hand property provided no previous claims have been made. The first step to claim any relevant capital allowance would be to have an experienced Chartered Surveyor undertake a due diligence of the property ownership history. The resultant allowances could be anything between 20% - 40% of the property purchase price; should these allowances be available.
How do I claim capital allowances?
Capital allowances must be claimed in your Self-Assessment Tax Return if trading as an unincorporated business or in the company’s Corporation Tax Return if trading as an incorporated business. The claim should be made in the tax return which covers the date of the relevant expenditure.
How much can I claim?
This depends on the nature of expenditure; the form of capital allowances being claimed and when the expenditure has been incurred. As an example, for 2022/23, the current rates and pools are:
- Plant & machinery - 18%;
- Long life assets - 6%; and
- Structures & buildings allowances - 3%.
In order to incentivise business expenditure on certain items, HMRC currently offers generous reliefs on the following:
- Annual investment allowance - currently 100% on expenditure up to £1 million;
- Super-deduction - 130% is available for new plant and machinery on expenditure between 1st April 2021 and 31st March 2023; and
- Electric cars - 100% relief on new and unused.
In the case of a super-deduction, this means that your tax rate will be reduced on plant and machinery-related expenses during this period. Again, if you are unsure of the current rates and pools, visit the HMRC website or contact a professional accountant.
Contact Monetta
For advice on capital allowances, or to find out more about how we can help, please call us or complete an enquiry form. Monetta has many years of experience in helping businesses to decipher their capital allowances obligations.
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