Capital allowances are the sums of money a UK business can deduct from the overall corporate or income tax on its profits. These sums derive from certain purchases or investments, outlined in the Capital Allowances Act 2001.
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A capital allowance is given instead of depreciation for certain types of asset. Depreciation is not allowed as a deduction for tax purposes, and must be added back to net profit for tax purposes. If capital expenditure does not qualify for a capital allowance, it means that the business gets no tax relief for such expenditure.
Categories of asset
Capital allowances may be claimed for:
Historically, there have also been capital allowances for industrial and agricultural buildings. These have now been phased out, though an allowance may now be claimed for features integral to a building
Plant and machinery
Of these, by far the most important category is plant and machinery.
Neither term is defined in legislation, though guidance is given by HMRC
This defined machinery as anything that has a moving part. It does not have to be mechanically powered, so a hand operated device qualifies.
The term "plant" is defined in the court case Yarrow v France which was not a tax case. This held that plant "includes whatever apparatus is used by a businessman for carrying on his business - not his stock in trade, which he buys or makes for sale; but all goods and chattels, fixede or dead, which he keeps for permanent employment in his business". In that case, it was held that his employer's horse was plant.
The scope of exactly what comes within the scope has been the subject of many cases. Among the more important cases, the following have been held to be plant:
Where a capital allowances claim has been made on a property a new purchaser can only make another claim valuing the plant and machinery at the same rate as claimed previously. Further claims can be made on a property where it is extended or re-developed but only on those new elements of plant and machinery introduced to the building.
The amount of the allowance depends on what is claimed for. In some cases, the rates are different in the year a business entity made the purchase from those in subsequent years.
A business operator cannot claim capital allowances for things bought or sold: these are claimed as business expenses. If a business asset is bought on a hire purchase basis, the original cost of the item can be claimed as a capital allowance, but the interest and other charges count as business expenses.
Types of allowance
The main types of capital allowance are:
AIA is claimed for plant and machinery, with some exceptions such as for cars. It is fixed amount regardless of the size of the business and so is worth proportionately more for smaller businesses. The amount has varied many times since its introduction. In the 2015 summer Budget it was announced that it would be fixed at £200,000 until 2020.
FYA may be claimed in the tax year in which the asset was acquired. It has largely been replaced by AIA. It may still be claimed for certain energy-saving products.
WDA applies to such amounts of allowable expenditure that are not relieved by either AIA or FYA. Broadly it requires all assets to be put into either a general pool, a special pool or a single-asset pool. Assets in the general pool are written down at 18% while those in the special pool are written down at 8%. An asset in a single-asset pool is written down at either 8% or 18% depending on its nature. The advantage is that, on disposal, the whole of the written down value may be offset against taxable profits. The whole balance of a pool may be written off if it falls below £1,000.
BA applies when a business ceases.
Technical considerations
Capital allowance reliefs can be set against the client’s taxable profits reducing the amount payable. Companies pay Corporation Tax at 20% or 26% (2011-12 figure), whilst individuals pay tax at 20%, 40% or 45%. Please note as it is an allowance against taxable profit, you have to be a tax payer to benefit, therefore this does not normally apply to property owned in SIPPS or by charities and trusts. Allowances are generated when a business client builds or acquires commercial property. The amount of plant contained within the building or acquired property is the key to maximising the relief.
The claim should be considered as an effective discount and cash contribution to the construction cost or purchase price. The claim provides a tax saving that accrues over time. It is possible to claim allowances on investment properties but plant let in a "dwelling house" is excluded. Blocks of flats, halls of residence etc. will therefore qualify.
For property that is being acquired, the specialist can apportion the purchase price under a recognised HMRC formula, and this is where the inherent property skill can maximise the claim with optimal costing of the plant contained within the property