Capital Allowances
What are capital allowances?
Capital allowances are tax reliefs that allow businesses to deduct the cost of certain assets (such as machinery, equipment, and fixtures) from their taxable profits. These allowances help reduce your overall tax liability, making them essential for optimising your financial position.
Qualifying Expenditure and Activities
Qualifying Expenditure:
- To claim capital allowances, you must have incurred qualifying expenditure on eligible assets. This includes both the purchase price and any associated installation costs.
- Examples of qualifying assets:
- Plant and machinery (eg computers, vehicles, manufacturing equipment)
- Fixtures (eg lighting, heating systems, air conditioning)
- Integral features (eg lifts, escalators, fire alarms)
Qualifying Activities:
Capital allowances can only be claimed for assets used in your business activities. For instance:
- A hotel can claim the cost of a chandelier in its reception area because it enhances the aesthetic appeal and attracts guests.
- However, a shoe factory cannot claim the same chandelier because it doesn’t directly contribute to shoe production.
Types of Capital Allowances
First-Year Allowances (FYA)
- FYA allows 100% of the cost of a qualifying capital assets (e.g., machinery) to be claimed in the year acquired.
Annual Investment Allowances (AIA)
- AIA permits a full deduction up to an annual limit (currently £1 million as at July 2024) for qualifying capital assets acquired during the year.
Writing Down Allowances (WDA)
- In some circumstances, including if the AIA has been exhausted, a business can simply claim an annual WDA, which is claimed at the following rate:
- Main Pool (MP): 18% rate for assets like business equipment and furniture.
- Special Rate Pool (SRP): 6% rate for assets such as air-conditioning systems.
Structures and Buildings Allowances (SBA)
- Introduced in 2018, SBA applies to structural works (eg walls, floors, roofs) related to non-residential businesses.
- It is claimed at a fixed 3% straight-line deduction each year.
Other Forms of Capital Allowances
- Business Premises Renovation Allowances: For disadvantaged areas.
- Enhanced Capital Allowances: First-year relief for the purchase of specific equipment.
- Research and Development Allowances: 100% claim in year 1 available for assets used in R&D processes.
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