Capital allowances give valuable UK tax relief for ‘capital’ investment in business facilities and equipment. Capital expenditure creates an asset or business advantage that typically lasts for a couple of years or more, with the spend normally being recorded on a business’s balance sheet as a tangible fixed asset.
How is the capital allowances tax relief calculated?
Capital allowances underpin a business’s corporation tax or income tax calculations. For tax purposes only, capital allowances effectively convert longer-term investment spend into a tax-deductible business expense that can be written-off for tax against business profits.
Capital allowances are based on the amount of spend that qualifies for capital allowances multiplied by the effective tax rate that is being paid by the business.
A company liable to the 25% main rate of corporation tax makes a £100,000 investment in assets that qualify for capital allowances.
Claiming capital allowances allows the company to write-off that £100,000 for tax against business profits. This saves the company tax of £25,000 (that is £100,000 x 25%).
So, for corporates, every £1 of spend on equipment qualifying for capital allowances is worth a tax saving of between 19p and 25p depending on whether the 19% small profits rate or 25% main rate of corporation tax applies, and whether marginal relief is available which gradually smooths the transition between the 19% and 25% rates.
For income taxpayers, the savings are typically higher because while the basic rate of income tax is 20%, the higher rate is 40%, the additional rate is 45% and the marginal rate can be as much as 60% for a slice of some taxpayers’ income because the basic tax-free personal allowance is gradually removed by £1 for every £2 of income over £100,000.
Capital allowances rates explained
However, in practice the calculation is usually much more complicated because there are different types of capital allowances for different assets or dates of spend, with multiple amounts and rates of tax relief available. So, the amount and timing of receiving tax relief can vary.
The two most often claimed forms of capital allowances are plant and machinery allowances (PMAs) and structures and buildings allowances (SBAs).
Plant and machinery allowances
The most commonly claimed type of capital allowances is called plant and machinery allowances.
Plant and machinery allowances are given at several rates.
- At the top end, as much as an immediate 130% of the money spent can qualify (that is a 30% uplift on tax relief called a ‘super-deduction’).
- For qualifying spend up to a £1m ceiling in each year, immediate relief is often also available in full by claiming a 100% ‘annual investment allowance’.
- In the Spring Budget 2023, a 100% relief called ‘full expensing’ was announced for some types of plant or machinery.
- At the lower end just 18% a year reducing balance (called main rate pool ‘writing-down allowances’) or 6% a year reducing balance relief may be available (called special rate pool ‘writing-down allowances’), which means the relief is given slowly over a number of years.
Structures and buildings allowances
Structures and buildings allowances exist for spend since late October 2018 and were initially given at a flat rate of 2% a year over 50 years. But since April 2020, the rate has been 3% over 33⅓ years. Or if the structure or building is in a freeport and the appropriate conditions to qualify are met, the relief is 10% a year over 10 years (freeports are special sea, air or rail port economic zones benefitting from customs and tax incentives including better capital allowances).
What can be included in a capital allowances calculation?
Plant and machinery allowances are available for spend on machinery and business equipment (called ‘plant’ in legal jargon). This includes obvious business machinery, apparatus and equipment as well as many normal ‘fixtures’ in commercial properties, such as fittings and furnishings, sanitary appliances, electrical power and lighting, hot and cold water, heating, ventilation, air conditioning and fire alarms.
Structures and buildings allowances are available for spend on non-residential structures and buildings, or parts of them, that are not eligible for plant and machinery allowances or land remediation relief. A building is anything of reasonably substantial size with walls and a roof. Structures include roads and car parks, walls and fences and other substantial built assets that are distinct from the earth surrounding them.
To make the most of a capital allowance claim, the ‘devil is in the detail’. It is not just the obvious cost to buy an asset that qualifies, but it is also often possible to include other costs that relate to providing or installing the asset, such as building project overheads or associated professional fees.
What must be excluded from a capital allowances calculation?
Capital allowances are not available for ‘revenue’ spend. Revenue expenditure for tax purposes means buying an asset with the intention of selling it (that is, property which is trading stock), or repairing and maintaining subsidiary parts of an asset on a like-for-like or nearest modern equivalent basis.
Buying land never qualifies for capital allowances, and neither does altering land in most circumstances unless it is just to install qualifying plant or machinery or to create an SBA-qualifying building or structure.
The capital allowance rules for plant or machinery fixtures that are bought or sold as part of freehold or leasehold property are particularly complicated in practice and often counter-intuitive. The amount that can be claimed may differ depending on the type and use of the property; when it was bought, built or improved by previous owners; and the history of capital allowances claims made by previous owners.
When should capital allowances be calculated?
The best time to calculate the spend that qualifies for capital allowances is around the time when the qualifying assets are bought or installed. That way, the expenditure is fresh in the mind and good records will be available to maximise and support the claim.
The capital allowances are then claimed in the business’s corporation tax return or income tax return when it is submitted to HM Revenue in the normal way. But if that tax filing deadline is missed, it may be possible to amend the tax return to claim the capital allowances or make the claim in the tax return for a later tax period.
Calculating capital allowances can be complex and time consuming, and the value involved can be considerable, especially for plant and machinery fixtures or structures and buildings that are bought or sold as part of freehold or leasehold property. So, it is a good idea to consult a specialist capital allowances adviser and valuer rather than leaving it to be dealt with by a non-specialist tax adviser or surveyor.