Capital Allowances

Capital allowance overview

The cost of purchasing capital equipment in a business is not a revenue tax deductible expense. However tax relief is available on certain capital expenditure in the form of capital allowances.

The allowances available depend on what you’re claiming for. In this factsheet we give you an overview of the types of expenditure for which capital allowances are available and the amount of the allowances.

Capital allowances are not generally affected by the way in which the business pays for the purchase. So where an asset is acquired on hire purchase (HP), allowances are generally given as though there were an outright cash purchase and subsequent instalments of capital are ignored. However finance leases, often considered to be an alternative form of ‘purchase’ and which for accounting purposes are included as assets, are denied capital allowances. Instead the accounts depreciation is usually allowable as a tax deductible expense.

Any interest or other finance charges on an overdraft, loan, HP or finance lease agreement to fund the purchase is a revenue tax deductible business expense. It is not part of the capital cost of the asset.

If alternatively a business rents capital equipment, often referred to as an operating lease, then as with other rents this is a revenue tax deductible expense so no capital allowances are available.

Acquisitions

The Annual Investment Allowance (AIA) provides a 100% deduction for the cost of most plant and machinery (not cars) purchased by a business up to an annual limit and is available to most businesses. Where businesses spend more than the annual limit, any additional qualifying expenditure generally attracts an annual writing down allowance (WDA) of only 18% (or 6% for the special rate pool) depending on the type of asset. Before April 2019 the special rate pool writing down allowance was 8%. For chargeable periods spanning April 2019, the rate of WDA will be a hybrid of the rates before and after the change.

The maximum amount of the AIA depends on the date of the accounting period and the date of expenditure. The AIA from 1 January 2019 is £1 million for two years. Thereafter it will revert to £200,000. From 1 January 2016 to 31 December 2018 it was £200,000. Complex rules apply to accounting periods straddling 1 January 2019.

Where purchases exceed the AIA, a WDA is due on any excess in the same period. Cars are not eligible for the AIA, so will only benefit from the WDA (see special rules for cars).

Please contact us before capital expenditure is incurred for your business in a current accounting period, so that we can help you to maximise the AIA available.

Structures and buildings allowance

Expenditure incurred on business-related buildings and structures on or after 29 October 2018 will attract a 2% annual writing down allowance on a straight-line basis for the next 50 years. This allowance is designed to encourage investment in the construction of new structures and buildings that are intended for commercial use, the necessary works to bring them into existence and the improvement of existing structures and buildings, including the cost of converting existing premises for use in a qualifying activity. Neither land nor dwellings are eligible for relief. Where there is mixed use, for example, between commercial and residential units in a development, the relief is reduced by apportionment. No relief is available for work spaces within domestic settings, such as home offices.