Capital allowances are a way of obtaining tax relief for some types of capital expenditure. Capital expenditure being expenditure on items which provide an enduring benefit for trade. They are treated in a similar way to other business expenses when calculating taxable profits.
Capital allowances are only available for expenditure on certain types of assets. You must usually own the asset on which the capital allowances are claimed.
There are special rules relating to assets acquired on hire purchase or finance leases. Generally, these assets are treated as belonging to the person using them, even though legal ownership may not pass until a final payment is made at the end of the contract term. To claim capital allowances, these assets must have been brought into use in the business. Any interest on hire purchase items is a revenue (trading) expense and not part of the capital expenditure.
If you have hired or leased the asset but you will not own the asset at the end of the hire/lease period, capital allowances may not be claimed, but you can usually obtain some tax relief on the rental costs as revenue expenditure.
Capital allowances must normally be claimed in your self-assessment tax return and by 12 months after the 31 January filing deadline for the return.
Plant and machinery
The most common assets that qualify for plant and machinery capital allowances are as follows:
- motor cars
- vans
- computers, printers, etc.
- tools (such as lawnmowers, saws, etc.)
- specialist machinery
- integral features (fittings within a building that cannot easily be removed, such as water systems, electrical systems, heating or ventilation systems, etc.)
- fixtures and fittings (items that are fitted into a building but could be removed more easily than integral features, for example fire alarm systems)
There are currently two main types of capital allowances for plant and machinery.
Annual investment allowance
The annual investment allowance (AIA) provides 100% tax relief on assets qualifying as plant and machinery, subject to an annual maximum. Some assets are excluded from AIA, the most common ones are cars and integral features. The maximum annual investment allowance is currently £1 million.
It is not possible to claim AIA on assets which you owned and used for another reason (such as for personal use) before using them within the business or on assets that were given to you for your business.
Writing down allowances (WDA)
Expenditure on assets that don’t qualify for annual investment allowance (AIA) are pooled together in what is known as the main pool (or general pool), although some assets have to go in the special rate pool.
Writing down allowances (WDA) give tax relief on the value of assets held in the pool. The ‘normal’ allowance is a writing down allowance of 18% of expenditure in the main pool. There is also a writing down allowance of 6% for expenditure in the special rate pool.
The main items in the special rate pool will be long-life assets, integral features or cars. These items only attract a writing down allowance at 6% each year.
Cars
The government continues to use capital allowances to try and encourage the use of more environmentally friendly cars. Broadly, for cars bought after April 2021:
- New and unused cars with zero CO2 emissions and electric cars will attract a full 100% first year allowance.
- Cars with CO2 emissions of 50g/km or below and second-hand electric cars can claim 18% writing down allowance in the main pool.
- Cars with higher CO2 emissions can claim 6% writing down allowance in the special rate pool.
Note that allowances will be reduced according to the amount of private use for any car that you use privately as well as for business.
Vehicles used for business and private purposes
You can still claim capital allowances where a car is used for both business and private purposes, but you can only claim the business use proportion.
How to claim Capital Allowances?
Capital allowances are not given automatically, they are claimed as part of your tax return. If you require help claiming capital allowances please get in contact with us at [email protected]