What is capital allowances?
Depreciation of fixed assets charged in the accounts is not allowable in computing taxable profits. Instead, the UK government introduced capital allowances which is a form of tax relief that allows businesses which pay tax in the UK to deduct from their taxable profit (before calculating their tax liability), the value of their qualifying capital expenditure on assets such as equipment or buildings. Despite constant changes both historically and recently, capital allowances as we know it today is based on the system introduced in Income Tax Act 1945, to incentivise the reconstruction of British industry after the second world war. The current legislative framework for claiming capital allowances in contained in the Capital allowances Act 2001. Understanding case law precedents and HMRC guidance is also key in identifying qualifying expenditure. Capital allowances can be claimed not only by companies, but also partnerships, individuals and overseas investors which carry out qualifying business activities such as a trade, property business, furnished holiday let, etc.