Capital Allowances represent a tax deduction that businesses may make when they incur capital expenditure, as part of a trade. As such, it really does make sense to pay careful attention to any investments being considered, because it might just help reduce your taxable profits (and thus corporation tax or income tax charge). This is particularly the case right now (and up until 31 March 2023) as the Treasury have put in place a number of special measures to encourage new investment as we open up after the Covid-19 pandemic.
The Capital Allowances available fall into two main types:
- Writing Down Allowances (WDA’s) for plant and machinery
- Structures and Buildings Allowances (SBA’s) for the construction and renovation of commercial structures and buildings
This article focuses on the WDA’s (and associated FYA’s and AIA) as these will be most applicable to the majority of SME’s, who will hold plant & machinery.
Invest in Plant & Machinery
The definition of plant and machinery (P&M) is wide-reaching and includes such items as cars, vans, machinery, furniture, equipment and integral parts of a building (known as integral features). The rate of WDA claimed on any purchase will depend on the ‘pool’ of assets to which it is allocated. The majority of items of P&M will fall into the main rate pool, however there is also a special rate pool and a single asset pool which may be applicable to your business:
- Main rate pool – 18% annual allowance
- Special rate pool – 6% annual allowance
- Single asset pool – 18% or 6% annual allowance (*depending on the asset)
Assets that would be included in the special rate pool include integral features, items with a long life (>25 yrs) and cars with high carbon dioxide emissions, whilst the single asset pool would include assets with private use (applicable to sole traders and partnerships only) and short life assets.
In addition to the above allowances, there are the Annual Investment Allowance (AIA) and the First Year Allowance (FYA). For most SME’s it will be these allowances that business owners should pay most attention to, as they might allow the business to claim tax relief on the full cost of any asset(s) in the year of purchase. This is obviously far more attractive than claiming relief over several years.
The usual limit for the AIA is £200,000 pa, meaning that for an asset costing up to that amount, a claimant would get tax relief in full in the year purchased. However, as mentioned earlier in the article, as a result of recent Budget measures the AIA has temporarily been increased to £1,000,000 up until 31 March 2023 (this extension now covers the period from 1 January 2019). This is a significant increase and for any business now considering such an investment, the timing might be crucial with the AIA limit, currently due to end in March 2023.
Moving on to the final allowance; the First Year Allowance. This allowance is more restrictive in terms of the assets on which it can be claimed, however an important point is that where it can be claimed, it is in addition to the AIA (and does not count towards the AIA limit). For expenditure incurred from 1st April 2021 (until 31 March 2023) the FYA is available in two formats:
- Main rate pool – 130% first year allowance (the super-deduction)
- Special rate pool – 50% first year allowance
From a practical viewpoint the super-deduction will be more than sufficient for most businesses, in terms of giving full tax relief on any purchase before 31 March 2023. It is however important to remember the eligibility criteria, with the super-deduction only being available to companies and where the asset is bought new and is a main rate pool asset. If you are buying second-hand or special rate assets, you will need to consider the AIA instead.
If your accounting period straddles 31 March 2023, you will also need to apportion any FYA or AIA claim to reflect the rates that may apply beyond that date.
Time for a new car
The amount of capital allowances that can be claimed on new cars is based on the carbon dioxide emissions, as this is part of the government’s strategy to encourage investment in electric cars. So, for fully electric, brand new and unused cars with a CO2 emissions of 0g/km, a 100% FYA allowance can be claimed. This rate also applies to zero-emission goods vehicles and the installation of a new charging point.
If you are not yet ready for brand new electric car, but prefer to look at second-hand and/or higher emission cars, you will have to settle for WDA’s at either the main rate of special rate. At present the defining emissions are:
- New & unused or second-hand, CO2 < 50g/km – main rate allowance of 18%
- New & unused or second-hand, C02 > 50g/km – special rate allowance of 6%
As an aside, with the taxable BIK also being as low as 2% (for the 22/23 tax year) of the list price on some electric cars; when you factor in both the BIK rate and capital allowances available, there’s clearly an incentive to go electric.
An integral feature is an item of P&M which is integral to a building. Examples of this would commonly include a lighting system, a heating system or a lift. As this type of expenditure falls into the special rate pool, it means that the business can claim the 100% AIA or 50% FYA super-deduction where available. If neither are available, then only the 6% WDA will apply.
Care should be taken to distinguish between revenue expenditure (a repair) and capital expenditure, because capital allowances can only be claimed on the latter. Fixing an existing system is generally considered a repair, however where you replace an integral feature and the expenditure incurred is more than 50% of the cost of replacing the integral feature, that is then considered capital expenditure.
Although it is relatively simple to understand the claiming of capital allowances on the purchase of an asset and improvements to existing assets, it should also be recognised that there may also be the possibility of claiming allowances for the features already present in a building when it is acquired. The important considerations in understanding whether a claim can be made, include:
- The business is a qualifying trade or property business
- The vendor has pooled the assets (with a CAA 2001, s198 election agreed)
If the vendor has not pooled the assets, it may still be the case that the purchaser is the first entity to claim on the asset. This situation will typically arise where the property is sold for the first time since 2008 (when current rules came in) giving the purchase first entitlement. Where a property may have changed hands several times, it can therefore be very difficult to work out if it is possible to make a first entitlement claim on as asset.
The information herein will hopefully have given you a sufficient knowledge to understand where your business may be able to benefit from capital allowances. Although typically, claims for capital allowances will only be considered and claimed by your accountant, when the year-end accounts and company tax return are completed, it also makes sense give this matter a wider thought. If you are planning ahead or indeed looking back (where a business property is involved), there may be actions to consider in terms of the timings of investments or just an overall review of potential claims.