What are capital allowances?
Capital allowances are a tax-deductible amount a business can claim on capital items, which are used in the business’ trade. If you built or bought a property or incurred capital expenditure on plant and machinery or computer equipment that is in use for the purpose of a trade or rental business, you can probably claim.
Further detail on the super deduction and annual investment allowance (AIA) can be found in our April blog post on the following link – https://bernard-rogers.co.uk/super-deduction-and-capital-allowances/
Benefits of claiming capital allowances
Claiming the correct amount of capital allowances can reduce or eliminate a tax liability, or even result in a repayment of taxes paid in earlier years (if a loss if made).
Types of capital allowances claim that can be made:
- Plant and equipment claims only
Most claims relate to plant items acquired during the course of normal trading, such as machinery, vans, furniture, tools etc. Capital allowances are also available on cars but at generally lower rates. However, very generous capital allowances are currently available on electric cars. We would normally make these types of claims for you automatically when we prepare your year-end accounts.
- Land and buildings claims and mixed claims
Below are some examples of more complex claims that could be made, and the relevant property types to which they apply. This would be the same for new and second-hand properties. It would apply to work carried out on refurbishment, repair, fit out and extensions where items eligible for capital allowances claims were involved.
- Offices, restaurants, hospitals, hotels etc.
- Retail and shopping centres
- Factory and manufacturing plants
- Leasehold improvements
- Mixed use developments
- Rental properties – apartments and houses
This list is not exhaustive but gives an idea of the range or projects to which a substantial capital allowances claim could apply. It is also important to note that some items that would not normally be considered as plant items qualify as “integral features”, and can attract capital allowances, albeit at lower rates. Examples of integral features might include a cold water system, a lift or escalator or lighting system.
Frequently asked questions on capital allowances
- Is there a list of qualifying plant and machinery that I can use to calculate my claim?
No, there is no approved list. This is a common misconception. There is no legislative definition of the term “plant and machinery”, so the identification of qualifying items is not always straightforward
- How is Plant and machinery identified?
Plant and machinery must be identified on a first principles basis. Whether an item qualifies must be determined by reference to the facts, the nature of the trade, and the function of the item in the trade. A number of conditions/tests must be satisfied, but it is usually moveable (but not always)
- Do all fixed asset additions qualify for capital allowances?
No, not all capital expenditure qualifies for capital allowances
- What does entitlement mean?
A taxpayer must satisfy the relevant criteria in the legislation in order to be eligible to make a claim
- Can landlords claim capital allowances?
Generally yes, where the property is let. It is, however, critical to establish entitlement, especially in a landlord / lessee situation
- Can property developers claim capital allowances?
Yes, when they put the property or plant & machinery in use for the purposes of a trade or rental business
- I bought/built/refurbished a property a number of years ago, but I have not claimed capital allowances (or may have under-claimed). Can I claim the allowances now?
Depending on the facts and circumstances, you may be able to go back and amend your tax return to include the allowances that you should have claimed
- What happens to the allowances that I don’t use?
Depending on facts and circumstances, unused wear and tear allowances and industrial buildings allowances can be carried forward indefinitely and used to shelter future liabilities i.e. they will not be lost. Capital allowances can also create trading losses which may also be carried forward to future years to offset against future trading profits
Conclusion
We generally claim capital allowances on plant items for you during the process of preparing your annual accounts and tax return.
If you need any advice in this area please contact us. We can usually assist in the majority of cases, but in very complex cases can refer you to a capital allowances specialist.
