Capital allowances are a tax relief designed to encourage business investment. When a business purchases certain qualifying assets, capital allowances can be claimed, thereby allowing the business to write off the cost of those assets against taxable income.
Capital allowances are generally available to limited companies, property companies, the self-employed and partnerships.
To benefit fully from capital allowances and any other tax relief in relation to the purchase of assets requires full consideration of a company’s tax position and of the key elements of capital allowances:
- Which assets are eligible?
- How are different categories of asset treated?
- How to make a claim?
Qualifying assets
To qualify for a capital allowances claim, the asset in question must be owned by the business; leased and hired assets cannot be claimed for.
Only certain types of asset qualify for a capital allowance claim and while there is no complete or exhaustive list of what may be claimed, the general categories include:
Plant and machinery
Plant and machinery are one of the most common types of asset claimed for under capital allowances but not always the easiest to understand.
This category covers:
- items purchased to be used in the business, including equipment, machinery and business vehicles
- the cost of alterations to a building so that new plant and machinery may be installed
- the cost of demolishing existing plant and machinery
- integral features (e.g. lifts, air conditioning systems, electrical systems) and certain fixtures (e.g. fitted kitchens and fire alarm systems)
Although alterations and demolition may qualify under capital allowances, repairs do not.
Items that are not considered plant and machinery for the purpose of capital allowance claims include leased or rented items, buildings (and the related doors, gates, gas systems and mains water systems), land and structures such as bridges or roads, and business entertainment items.
Businesses are often unaware of what is categorised as plant and machinery for the purpose of capital allowance claims, especially in the case of integral features and fixtures, and may therefore miss out on the full tax benefit available.
Research and development
Under this category, research and development carried out by a business in relation to their trade may be eligible for a capital allowance claim of 100%.
Expenditure on the provision of facilities for the purpose of research and development may also be eligible for a capital allowance claim.
Patents and know-how
Qualifying expenditure on patents and intellectual property relating to industrial techniques and processes may currently be claimed under capital allowance at 25%.
Mineral extraction and dredging
Qualifying expenditure on either of these processes may be claimed under capital allowance at 25%.
What are capital allowances rates?
Capital allowance rates vary depending on the category of asset and the circumstances of purchase. The onus is on the taxpayer to correctly calculate any capital allowances claim and to avoid coming under the scrutiny of HMRC.
The general capital allowance rates include:
Annual investment allowance (AIA)
Under the AIA, 100% may be claimed against the purchase of any qualifying asset up to a total amount of £1 million in any tax year.
You may not claim for cars, assets you already owned for non business use before using them within the business, or gifts made to the taxpayer or the business. However, these may be claimed under a writing down allowance.
Writing down allowance (WDA)
Where a capital allowance claim is over the AIA limit, it may be possible to claim for this excess amount through WDA.
The related assets are grouped into pools, depending on the category of assets.
The pool rates are:
- main pool – 18%
- special rate pool – 6%
- single asset pool – 18% or 6% depending on the asset
Small pool write-off
Where your total capital allowance claim is in excess of the AIA limit and the value of a pool, before WDA, is less than £1,000 for a tax year, it may be advisable to make a Small Pools allowance claim. The balance of the small pool is then written off.
Capital allowances on cars
You can claim capital allowances for cars purchased and used for commercial purposes. This allows you to deduct a portion of the value from your profits before to taxation.
Capital allowance claims for cars cannot generally be made under the annual investment allowance; instead, you should use writing down allowances. The relevant capital allowance rate will depend on the year of purchase and CO2 emissions.
If the vehicle qualifies for the 100% first-year allowance — for instance, if it is an electric vehicle or a vehicle with zero CO2 emissions — there is a different method for calculating the amount that can be claimed.
Cars bought from April 2021
| Description of car | What you can claim |
|---|---|
| New and unused, CO2 emissions are 0g/km (or car is electric) | First year allowances |
| New and unused, CO2 emissions are 50g/km or less (or car is electric) | Main rate allowances |
| Second hand, CO2 emissions are 50g/km or less (or car is electric) | Main rate allowances |
| New or second hand, CO2 emissions are over 50g/km | Special rate allowances |
Cars bought between April 2018 and April 2021
| Description of car | What you can claim |
|---|---|
| New and unused, CO2 emissions are 50g/km or less (or car is electric) | First year allowances |
| New and unused, CO2 emissions are 110g/km or less (or car is electric) | Main rate allowances |
| Second hand, CO2 emissions are 110g/km or less (or car is electric) | Main rate allowances |
| New or second hand, CO2 emissions are over 110g/km | Special rate allowances |
Cars bought between April 2015 and April 2018
| Description of car | What you can claim |
|---|---|
| New and unused, CO2 emissions are 75g/km or less (or car is electric) | First year allowances |
| New and unused, CO2 emissions are 130g/km or less (or car is electric) | Main rate allowances |
| Second hand, CO2 emissions are 130g/km or less (or car is electric) | Main rate allowances |
| New or second hand, CO2 emissions are over 130g/km | Special rate allowances |
Cars bought between April 2013 and April 2015
| Description of car | What you can claim |
|---|---|
| New and unused, CO2 emissions are 95g/km or less (or car is electric) | First year allowances |
| New and unused, CO2 emissions are 130g/km or less (or car is electric) | Main rate allowances |
| Second hand, CO2 emissions are 130g/km or less (or car is electric) | Main rate allowances |
| New or second hand, CO2 emissions are over 130g/km | Special rate allowances |
Cars bought between April 2009 and April 2013
| Description of car | What you can claim |
|---|---|
| New and unused, CO2 emissions are 110g/km or less (or car is electric) | First year allowances |
| New and unused, CO2 emissions are 160g/km or less (or car is electric) | Main rate allowances |
| Second hand, CO2 emissions are 160g/km or less (or car is electric) | Main rate allowances |
| New or second hand, CO2 emissions are over 160g/km | Special rate allowances |
Author
Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.
Gill is a Multiple Business Owner and the Managing Director of Prof Services Limited - a Marketing & Content Agency for the Professional Services Sector.
