Capital Allowances allow businesses in the UK to deduct the value of qualifying capital expenditure from their taxable profit.
This essentially means that the government is giving you tax relief when you invest in your business with purchases such as equipment, machinery, motor vehicles, fixtures and fittings, and commercial property acquisitions/construction/renovations. Instead of paying tax on the full amount of your profit each year, you get to deduct some or all of the cost of these assets first.
The potential savings can make a huge difference. HMRC’s Corporation Tax Statistics 2024 report shows that businesses claimed £155.3 billion in the 2022-23 financial year.
They’re designed to encourage investment in the UK by supporting businesses as they purchase new or upgraded qualifying assets, in the hope that this will lead to more sustainable and efficient operations, innovations, or even business expansion – all of which help to power the UK economy.
Our guide to Capital Allowances has been written to help organisations make the most out of this valuable government scheme.
A brief history of Capital Allowances
The Capital Allowances system as we know it today has been around since 1945, when it was introduced to help rebuild the British economy after World War II. The legislative framework that we use today for Capital Allowances comes from the Capital Allowances Act 2001, although there have been several revisions and policy changes since then.
If you’re interested in learning more, the government has written an interesting article on the history of Capital Allowances, dating back all the way to 1878.
Who can claim Capital Allowances?
Capital Allowances are generally available for those who pay corporation tax in the UK, including companies, partnerships, individuals and overseas investors.
You can claim plant and machinery allowances (PMA) if you’ve purchased the asset for a qualifying work-related activity, which includes:
trade
an ordinary UK property business
an ordinary overseas property business
profession or vocation
mine, quarry or canal or other concern giving rise to profits from land charged to tax as a trade under ITTOIA/S12 (4) or S39 (4) CTA 2009
The definition of plant and machinery is fairly broad, but you should generally think of equipment, machinery and vehicles used for business purposes. This includes software, which HMRC treats as plant.
Examples of main rate plant and machinery expenditure include:
items that you keep to use in your business, including cars
costs of demolishing plant and machinery
parts of a building considered integral, known as ‘integral features’
some fixtures, for example fitted kitchens, bathroom suites, fire alarm and CCTV systems
alterations to a building to install plant and machinery (this does not include repairs)
Examples of special rate plant and machinery (incl. integral features) expenditure include:
items with a long life
solar panels
lifts, escalators and moving walkways
space and water heating systems
air-conditioning and air-cooling systems
hot and cold water systems (but not toilet and kitchen facilities)
electrical systems, including lighting systems
external solar shading
The rates for PMA vary as there are several types:
18% and 6% writing down allowances (WDA)
There are different standard rates for different types of assets, for example, 18% for the main pool and 6% for the special rate pool.
Writing down allowances (WDA) let you claim a percentage of the qualifying plant and machinery that doesn’t qualify for the super-deduction, full expensing or the AIA.
130% super-deduction
The super-deduction lets companies, subject to corporation tax, deduct up to 130% of the cost of qualifying new and unused plant and machinery assets purchased between 1 April 2021 and 31 March 2023.
100% full expensing
Full expensing is an accelerated allowance that lets companies, subject to corporation tax, deduct the full cost of qualifying main pool plant and machinery purchased from 1 April 2023.
While investments in second-hand assets or items bought for leasing aren’t eligible for full expensing or the super-deduction, you can usually claim for these through the AIA.
50% special rate allowance
The 50% first year allowance allows you to claim 50% of the qualifying special rate plant and machinery like lighting, heating installations, power installation, or other integral or long-term assets in the first year the expenditure was incurred.
100% annual investment allowance (AIA)
The annual investment allowance (AIA) is an accelerated form of tax relief, letting you claim 100% of the cost of qualifying assets from their profits up to £1 million per year. You can claim AIA on most types of plant and machinery, including expenditure that falls into the special rate category, but not business cars, items you previously owned before you started the business, or items that have been given to you or your business.
Structures and buildings allowance (SBA)
Structures and buildings allowances (SBA) can be claimed on costs towards the purchase, construction or renovation of non-residential structures and buildings incurred on or after 29 October 2018. SBA’s include fees for design, site preparation, construction works, renovation and conversion costs. They are available at a rate of 3% per annum on a straight-line basis over 33.3 years and the first person to use the structure must create an SBA allowance statement.
Capital Allowances cannot be claimed on the acquisition of land, but there is Land Remediation Relief available for expenditure on remediating contaminated or derelict buildings and land.
Research and development allowances (RDA)
If you incur capitalised expenditure on qualifying assets for research and development such as buildings, equipment or furniture, you can deduct 100% of the qualifying expenditure in the year you buy them.
You can only claim research and development allowances (RDA) if your business is a trader (i.e., you sell goods or services to customers), and the R&D you’re doing is directly related to that business activity.
R&D Tax Credits are also available for innovative businesses, although you can’t claim both R&D Tax Credits and RDA on the same expenditure.
How do you calculate Capital Allowances?
Each business’s asset investments are unique, so calculating Capital Allowances can be complex to work out, depending on your circumstances. Below is a very simple example of how much Capital Allowances can potentially save a business.
This example assumes:
the full 100% annual investment allowance limit of £1m has been used
there is also £500,000 worth of main rate plant and machinery expenditure, which qualifies for the 100% full expensing allowance
and there is £600,000 worth of special rate plant and machinery expenditure, which qualifies for the 50% special rate allowance
Capital Allowances are not given automatically, they must be claimed in an open tax return. There is no time limit for claiming Capital Allowances, you can go as far back as necessary into previous accounting periods to identify additional tax relief, as long as the asset is still owned and used within the trade.
However, the super-deduction, first year allowances, full expensing and the 50% special rate allowance can only be claimed in the accounting period in which the expenditure incurred.
Are Capital Allowances changing?
In the UK Autumn Budget 2024, the government said they will maintain the current “generous” Capital Allowances system, including 100% full-expensing and the £1 million annual investment allowance. This shows a clear commitment by the government to continue investment into the Capital Allowance regime.
At the same time, HM Treasury also published a Corporate Tax Roadmap which suggested that they may introduce amendments in the future of the current Parliament, which might potentially aim to:
give greater clarity on what qualifies
simplify full expensing allowances
address business concerns about predevelopment costs
extend full expensing to assets purchased for leasing or hiring
How Leyton can help
Our team of Capital Allowance specialists come from a broad range of industries, including engineering, manufacturing, construction and surveying. Their deep understanding of both case law and HMRC guidance allows them to uncover every asset eligible for tax relief as well as give guidance on the most tax-efficient way of claiming for Capital Allowances to maximise your savings.
Our approach is unique, as our advice covers the full development lifecycle, from planning and design to construction, occupation, and eventual sale or disposal of properties. We’ll also support your business through every step of the Capital Allowance claims process, including:
Scoping: We’ll explore potential tax relief opportunities for your business.
Due diligence: We’ll confirm your eligibility to claim allowances.
Site visits: Where possible, we’ll conduct an on-site survey to assess your assets.
Detailed analysis: We’ll dig into the detail to identify your qualifying expenditure.
Reporting and filing: We’ll prepare a supporting report for you to file with your tax return.
Post-filing: We’ll assist with any relevant post-filing requests from HMRC.
