What is capital allowances?

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.

Valuable cash savings for your business

    Thanks! We will be in touch shortly

    Types of capital allowances

    Types of capital allowances

    Capital allowances is a vast topic and there are various forms, types and categories. The most common form of capital allowances is the plant and machinery 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 respect of energy and water efficient equipment, which have in recent years been repealed. 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).

    How to claim

    Most accountants and tax compliance advisors will typically have the knowledge to assist in making capital allowances tax relief claim on easy to identify business equipment such as IT kit, furniture, machines etc. For capital expenditure on less obvious qualifying assets such as those relating to buildings or large-scale industrial / engineering plants, the skills and services of a specialist capital allowances advisor would typically be required in order to maximise the tax relief benefit.

    The tax relief is obtained by introducing the claim into the tax return submission for the relevant accounting period. For registered companies, this would be the company tax return (CT600). For partnerships, this would be the partnership tax return (SA800), while for sole traders, it will be the self-assessment tax return (SA100/SA200). If the tax return for the relevant accounting period has already been filed with HMRC, the claim may be filed by amending the tax return if it is still available for amendment. Alternatively, the claim can be introduced into the tax return for any future accounting period.

    The benefit of the tax relief claim comes as a tax saving by default. I.e., reduction in tax liability. In some cases, when the business is loss making or does not have sufficient income or profit to absorb the tax relief, it is possible to do a loss carry back. The loss carry back to a prior profitable period will generate a cash refund from HMRC due to overpaid tax. It may also be possible to surrender the losses for a tax credit from HMRC in respect of qualifying expenditure on certain types of assets.

    Find out how much you can claim

    Contact our experts

    Capital allowances calculator

      Estimate the cash savings you may be entitled to on your capital spend

      Fields with * are required

        Type your information

        Fields with * are required

        Back

        Capital allowances calculator

        Estimate of allowances:

        Estimate of tax savings:

        Additional tax relief may also be available through the structures and buildings allowances.

          Back

          Thank you for your time

          Someone from our team will contact you

          Try another estimation

          How we can help

          Step Shape 1
          Step Shape

          Scoping

          Exploring availability of tax relief.

          Step Shape 2
          Step Shape

          Due diligence

          Confirming scope and establishing entitlement to claim.

          Step Shape 3
          Step Shape

          Site Visit

          Surveying the assets where necessary

          Step Shape 4
          Step Shape

          Detailed analysis

          Identifying qualifying expenditure

          Step Shape 5
          Step Shape

          Reporting

          Preparing and issuing claim  report.

          Step Shape 6
          Step Shape

          Filing support

          Assisting with filing and post-filing information.

          Our capital allowances team of qualified specialists with diverse experience and multidisciplinary construction and financial skills, leverage on their expertise to maximise cash saving benefits for businesses who incur capital expenditure.

          We provide a whole development lifecycle capital allowances advice from planning to design, construction, occupation and subsequent disposal or sale. This includes property sale and purchase transaction advise to support either the vendor to retain their capital allowances, or for the buyer to benefit from capital allowances on the purchase price paid.

          As shown below, our services include but are not limited to: Scoping exercise to explore what tax relief may be available to the business; due diligence to confirm scope and establish entitlement to claim; site visit to survey the assets where possible, in order to better understand their attributes such as construction technology and building engineering, as well as business use and function. We thereafter carry out a detailed analysis to identify qualifying expenditure and maximise the tax relief available. We subsequently prepare and issue our report to the business which can be filed with HMRC, along with the tax return in order to support the claim. We also go the extra mile in assisting the business with information in connection with the filing and any relevant post-filing requests.

          Why work with Leyton?

          We are an international consulting firm which helps businesses leverage financial incentives to accelerate their growth and achieve long lasting performance.

          With a multifaceted skillset comprising of construction, engineering, surveying, accounting and tax advisory, our dedicated capital allowances team is uniquely placed to apply their technical expertise and experience in identifying and maximising qualifying capital expenditure. This subsequently leads to valuable cash tax savings and improved business cash flow.

          We always keep compliance front of mind and have been delivering optimal services for over 24 years. This provides our clients with the peace of mind that they will receive the maximum financial benefit without unnecessary risks.

          26000

          Clients

          24

          Years of experience

          2200

          Experts

          26000

          Clients

          24

          Years of experience

          2200

          Experts

          What are the next steps?

          Are you planning to, or have you already incurred any commercial building or large-scale industrial and engineering plant related capital expenditure which may fall under any of the following categories?

          New construction | Refurbishment work | Fit out work | Buying buildings

          Please let us know as we can help you unlock and maximise cash tax savings and improve your business cash flow.

          Unlock and maximise your cash tax savings and improve your business cash flow.

          SPEAK WITH US