How to calculate Capital Allowances in the UK
Capital allowances give valuable UK tax relief for “capital” investment in business facilities and equipment. Capital expenditure creates an asset or business advantage that 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 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 19% 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 £19,000 (that is, £100,000 x 19%).
So, every £1 of spend on equipment qualifying for capital allowances is worth a tax saving of 19p at the 19% corporation tax rate applying until April 2023. Or 25p at the 25% rate coming into force after April 2023. For income tax payers, the savings are typically higher because the basic rate of income tax is 20%, the higher rate is 40% and 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 more complicated because there are different types of capital allowances with multiple amounts and rates of tax relief available. So, the timing of receiving tax relief can vary.
The two most commonly claimed forms of capital allowances are “plant & machinery allowances” (PMAs) and “structures & buildings allowances” (SBAs).
Plant & machinery allowances
The most commonly claimed type of capital allowances is called plant and machinery allowances.
Plant and machinery allowances (PMAs) 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”). And at the bottom end just 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.
However, for qualifying spend up to a £1 million ceiling in each year, immediate relief is often available in full by claiming a 100% “annual investment allowance”.
Structures & 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 apparatus and equipment as well as many normal “fixtures” in commercial properties, such as carpets, fittings and furnishings, sanitary appliances, electrical power and lighting, hot and cold water, heating, ventilation, air conditioning and fire alarms.
Structures and buildings allowances (SBA) are available for spend on non-residential structures and buildings, or parts of them, that are not eligible for plant & 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 allowances 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, trading property), 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.
Common errors when calculating capital allowances
HM Revenue & Customs publishes a capital allowances ‘toolkit’. This provides guidance on 28 errors they commonly see for plant & machinery allowances claims. These include whether:
- The claim has been made at the right time;
- The assets are owned, or deemed to be owned under capital allowances rules, by the business at the time the claim is made;
- The qualifying spend amount claimed is accurate;
- The right rate of relief has been claimed, or
- A property has been bought or sold together with “fixtures” that are plant & machinery;
The capital allowances rules for plant & 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 CA 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 & machinery fixtures or structures & 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.