Capital Allowances can be a complex area, and one that we are often asked about. In this blog, we answer some of the more commonly asked questions. If you have any other Capital Allowances related questions that we don't cover here, please do get in touch and one of our experts will be able to help.
What is meant by ‘capital allowances’?
These are the tax allowances that businesses can claim for capital expenditure. Capital expenditure cant be written off as a cost in the P/L . The only way tax relief can be claimed is through capital allowances. The allowances claimed are a deduction in calculating the profit on which tax is calculated.
What types of capital allowances are there?
There are a number of different capital allowances schemes. They all have quite tight definitions of what qualifies for allowances and what doesn’t. The main schemes cover plant and machinery, structures and buildings, and research and development.
What costs qualify for capital allowances?
Plant and machinery allowances can be claimed on the equipment that businesses need to function. However they can also be claimed on a lot of the services and fittings in the business premises. This can be very valuable when buildings are being constructed or are being bought or sold as the sums involved can be very large. Generally the deduction is spread over a number of years. The normal rate of allowances varies from 6%-18% per annum, though in many cases 100% can be claimed in the year in which the expenditure is incurred.
Other buildings costs may qualify for structures and buildings allowances. These are set at a very low annual rate of 3% pa. However as this lasts for 33 years, in the long run they can be quite valuable as the buildings costs could be very large.
Research and development allowances can be claimed on capital expenditure on R&D in special businesses that qualify. These are an alternative to the other allowances just described and they are much more generous as 100% allowances can be claimed on plant and machinery and buildings costs.
Who can claim capital allowances?
Businesses can claim, including companies, partnerships and sole traders. The way the allowances work is that they reduce the profit on which tax is calculated. So they only have value if the business would otherwise be paying more tax.
What has changed recently in capital allowances?
The biggest change was the introduction of the super deduction in March 2021 to stimulate major capital expenditure throughout the nation. This allows companies to claim 130% of the cost of qualifying plant and machinery to be set off against the profits in the year in which the cost is incurred. This is of potentially huge benefit to businesses and at it’s best, it can reduce their tax bill by £25 for every £100 they spend. However it is only a temporary relief, covering expenditure incurred between 1/4/21 and 31/3/23. It only applies to companies, not to sole traders or partnerships.
Are there specific sectors which benefit from capital allowances?
Not really, any sector can take advantage of capital allowances. However those sectors witnessing heavy investment at the moment will especially benefit, for example distilleries, care homes and hospitality & leisure.
For further information, you can download our Capital Allowances summary, "Unlocking the tax savings in your property" by clicking here. For assistance on any other type of Capital Allowances claim, please just click here to get in touch.
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