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Capital Allowances Explained

Secure tax relief for your business against certain types of capital expenditure.



Table of Contents:




What is Capital Allowances?


In the UK, capital allowances are tax reliefs that businesses can claim on specific capital expenditures. When a company invests in assets like machinery, equipment, or commercial property, it can deduct part of the cost from its taxable profits over time. This deduction reduces the company's overall tax liability, providing a financial incentive for business growth and investment.

The UK government sets specific rates for different asset categories, which determine the amount that 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 essential for efficient tax planning and financial management.

Investment in research and development (R&D) often involves spending on capital assets such as commercial property and equipment. Therefore, it makes sense for innovative businesses to consider these expenditures together.




Am I eligible for Capital Allowances?


If you have recently invested capital in purchasing, building, or improving commercial properties in your portfolio, and you are subject to income or corporate taxes, there is a high likelihood that you can take advantage of capital allowance benefits.


By meeting the criteria for Capital Allowances, your company can gain access to substantial financial rewards, enabling you to encourage business investment and promote economic growth and operational efficiency. You may qualify for Capital Allowances if:


  • You incur capital expenditure on qualifying assets.

  • You must use the assets for businesses purposes

  • Your business must be subject to UK cooperation tax or income tax.

  • You have maintained proper documentation and accounting records.



How does Capital Allowances work?


Capital allowances are not granted automatically; they must be claimed within your tax return. There is no time limit for 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 planning a refurbishment, it is important to review the available rates and allowances to help reduce the tax burden for your project.



The Impact of Capital Allowances on Tax Payable


Capital allowances are a form of tax relief for businesses on their capital expenditures. By reducing the taxable profit, capital allowances can significantly decrease the amount of tax a business owes. The following example illustrates how capital allowances can affect the tax payable by a company, based on a tax rate of 25%.


Scenario Overview:


Let's consider a company with the following financial details:

  • Profit Before Tax: £2,000,000

  • Tax Rate: 25%


Without Capital Allowances:


When no capital allowances are claimed, the company's taxable profit remains equal to its profit before tax. Here's the breakdown:

In this scenario, the company owes £500,000 in taxes.


With Capital Allowances


Now, let's assume the company claims capital allowances amounting to £1,000,000. The capital allowances reduce the taxable profit, which in turn reduces the tax payable. Here's the revised breakdown:

In this scenario, the capital allowances reduce the taxable profit to £1,000,000, resulting in a tax payable of £250,000.


Comparison and Conclusion:


The comparison between the two scenarios demonstrates the financial benefit of claiming capital allowances:


  • Without Capital Allowances: Tax Payable = £500,000

  • With Capital Allowances: Tax Payable = £250,000


By claiming £1,000,000 in capital allowances, the company reduces its tax payable by £250,000. This significant reduction underscores the importance of capital allowances as a tax planning tool for businesses.


In summary, capital allowances provide a valuable means for businesses to lower their taxable profits, thereby reducing the amount of tax they owe. This example highlights how strategic tax planning can lead to substantial tax savings.



What are the benefits of claiming Capital Allowances?


As the example above demonstrates, claiming capital allowances, enables businesses to recover a portion of their investment expenditure against taxable income or profits. This lowers the tax liability on profits and enhances cashflow available for additional business investment.


  • Reduces taxable profits and overall tax liability.

  • Frees up capital for reinvestment in business operations.

  • Enhances cash flow.

  • Encourages investment in new and efficient assets.

  • Enhances financial planning and tax management.



Who can claim for Capital Allowances?


In the UK, capital allowances can generally be claimed by:


  1. Businesses: Sole traders, partnerships, and limited companies that are subject to UK corporation tax or income tax.

  2. Property Owners: Individuals or businesses that own commercial properties and incur qualifying capital expenditure.

  3. Investors: Individuals or entities that invest in qualifying assets, such as machinery, equipment, or vehicles used for business purposes.

  4. Developers: Companies involved in property development or renovation that incur costs on qualifying capital assets.

  5. Innovative Businesses: Companies engaged in research and development (R&D) that invest in qualifying assets related to their R&D activities.

  6. Non-Profit Organisations: Charities and other non-profit entities that carry out trading activities and are subject to tax on profits.



What expenditure qualifies for Capital Allowances relief?


When claiming capital allowances, your business can access various types and rates of relief depending on the class of asset invested in. Examples of such expenditures are detailed in the table below:


PLANT & MACHINERY

SPECIAL RATE ITEMS

STRUCTURES & BUILDINGS

​Qualifying Expenditure: In the UK, plant and machinery for capital allowances encompass a broad range of assets that businesses can claim deductions on. These include:

  • Machinery and equipment

  • Commercial vehicles

  • Furniture and fixtures

Qualifying Expenditure: Including thermal insulation, electrical and illumination systems, as well as heating systems for both spaces and water. Also covered are powered ventilation setups, air-cooling systems, elevators and pedestrian conveyors, cold-water installations, and external solar screening.

Qualifying Expenditure: Capital expenditure on renovations and conversions of existing commercial structures or buildings, repairs incidental to the conversion or renovation of these structures, and associated construction costs for new properties.



What are the different types of Capital Allowances within the UK?


In the UK, there are several types of capital allowances available to businesses, each designed to provide tax relief for different kinds of capital expenditure. Here are the main types:


1. Annual Investment Allowance (AIA):

  • Allows businesses to deduct the full value of qualifying assets up to a specified annual limit in the year of purchase.

  • Covers most plant and machinery, excluding cars.

  • The limit can vary; businesses need to check the current threshold.


2. Writing Down Allowance (WDA):

  • Provides a deduction for a percentage of the remaining value of qualifying assets each year.

  • Rates vary based on the type of asset:

  • Main Pool: Standard plant and machinery, currently at 18% per year.

  • Special Rate Pool: Long-life assets, integral features of buildings, and cars with high CO2 emissions, currently at 6% per year.


3. First Year Allowances (FYA):

  • Allows businesses to deduct a significant percentage of the cost of certain qualifying assets in the year of purchase.

  • Applicable to specific environmentally beneficial or energy-efficient equipment.

  • Often set at 100% of the cost.


4. Structures and Buildings Allowance (SBA):

  • Provides relief for the costs of constructing or renovating non-residential structures and buildings.

  • Currently allows a 3% deduction of qualifying expenditure each year for 33 1/3 years.


5. Research and Development (R&D) Allowances:

  • Provides 100% relief for capital expenditure on research and development projects.

  • Includes costs related to R&D facilities and equipment.


6. Land Remediation Relief (LRR):

  • Provides tax relief for costs incurred in cleaning up contaminated land or buildings.

  • Allows for an additional 50% deduction on top of the 100% of the actual expenditure.


For more information regarding Land Remediation Relief and how it can benefit your business, please click here.



How to Apply:


If you believe that your business could benefit from an R&D Credit Tax Claim and would like to check your eligibility, then please click here to apply and a member of our specialist tax team will get in contact as soon as possible.


Alternatively, feel free to give us a call on 01908 429888 and we'll be happy to answer any questions you may have.

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