Capital Allowances

Types of capital allowances

1. Plant and machinery allowances (PMA)

   PMA provide tax relief on capital assets such as business equipment qualifying as plant and machinery. Furthermore, there are three main types of PMA as follows:
   
   First-year allowances (FYA)
   This allows a full deduction of the costs incurred on certain qualifying capital assets in the form of plant and machinery, during the (first) year the spend was incurred. Hence it is called “first year” allowances.
   
   Annual investment allowances (AIA)
   This allows a full deduction up to a certain annual limit in respect of the costs incurred on certain qualifying capital assets in the form of plant and machinery, during the year the spend was incurred. The current annual limit is £1m.
   
   Writing down allowances (WDA)
   This allows tax deduction at a reducing balance basis. The WDA has two pools or rates which includes the main pool (MP) rate of 18% on assets such as business equipment and furniture. There is also the special rate pool (SRP) of 6% on assets such as heating, ventilation, and air-conditioning systems. Some categories of WDA such as the following exist:
   
   Integral features (IF)
   These relate to lifts, heating, air-conditioning, electrics, lighting, water systems, etc.
   
   Short-life assets (SLA)
   These relate to assets with useful life of not more than 8 years.
   
   Long-life assets (LLA)
   These relate to assets with useful life of at least 25 years. The rate of tax deduction on the above categories is MP for SLA claims, and SRP for both IF claims and LLA claims.
   
   Where FYA and AIA does not apply, tax relief on PMA would typically default to WDA.
   

2. Structures and buildings allowances (SBA)

   SBA was introduced on 29th October 2018 (operative date). It is available on structural and similar building related works like walls, floors and roofs, in respect of a non-residential business activity. It is only claimable at 3% straight-line deduction annually. SBA is available where the construction work commenced (and its agreement entered into) on or after the operative date. Generally, except for land, the part of the asset or property that do not qualify for PMA may potentially qualify for SBA, assuming the operative date requirement above is met. To be able to claim SBA on a qualifying second -hand building, the claimant would need to be in a possession of a compliant “Allowances Statement” obtained from the vendor of the building to confirm certain legislative basis of claim.

3. Research and development allowances (RDA)

   RDA is available in respect of assets used in the process of carrying out research and development (R&D) such as building, equipment and furniture. The benefit is claimed in full at 100% in the year the spend is incurred. Less than 100% can be claimed in that year, but the balance cannot be claimed later. RDA is only available for businesses carrying out the qualifying activity of a trade. The tax relief is claimed from when the trade begins if the qualifying expenditure was incurred prior to that.

4. Other forms of capital allowances

   Other forms of capital allowances such as mineral extraction allowances and dredging allowances exist. There are also other capital allowances schemes such as Business Premises Renovation Allowances (BPRA) in respect of disadvantaged areas, and Enhanced Capital Allowances (ECA) in the first year that you purchase certain types of equipment. It is also worth noting that there are other capital allowances related tax relief such as, land remediation relief (available in respect of removal of contamination in land and buildings); and capitalised revenue deduction (available in respect of repairs and like for like replacements).