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Capital allowances explained
Capital allowances are tax deductions that UK businesses can claim on eligible capital expenditures, such as machinery, equipment, and property improvements.
These deductions reduce taxable profits, lowering overall tax liabilities. Capital allowances encourage investments in assets that promote business growth and efficiency.
Expenditure on capital assets such as commercial property often takes place alongside investment in R&D. As the UK's leading adviser on R&D tax relief, we bring award-winning tax expertise to your capital allowance claim as part of our wider support for innovative businesses.
Like R&D tax relief, capital allowances have undergone significant changes in recent years, including to rates and eligibility criteria. Here's everything you need to know if you're considering making a capital allowances claim.
What are capital allowances?
Capital allowances in the UK refer to the tax relief that businesses can claim on certain capital expenditure. When a company invests in assets like machinery, equipment, or commercial property, they can deduct a portion of the cost from their taxable profits over time. This reduces their overall tax liability, providing a financial incentive for business growth and investment.
The UK government sets specific rates for different asset categories, determining how much can be claimed each year. Capital allowances help companies manage their tax burden, encourage capital investment, and stimulate economic growth by freeing up funds for reinvestment in their operations. Understanding and maximising these allowances is crucial for efficient tax planning and financial management.
Investment in R&D often goes hand in hand with expenditure on capital assets such as commercial property and equipment. So considering the two together makes sense for innovative businesses.
Who is eligible for capital allowances?
Capital allowances can be accessed by property occupiers and investors.
If you’ve recently allocated capital funds towards the purchase, building, or improvement of commercial properties in your portfolio, and you are an income or corporate taxpaying entity, there’s a high likelihood that you can leverage capital allowance benefits.
Claiming capital allowances for commercial property
Looking to lower the tax liablities on your commercial property portfolio through capital allowances?
How do capital allowances work?
Capital allowances are not granted automatically, they must be claimed within your tax return. There is no time limit when claiming capital allowances, as long as the asset you are claiming for is still owned and used by the business.
When acquiring a property, or looking to embark on a refurbishment, it is important to review the rates and allowances available to help reduce the tax burden for your project
Matching your expenditure to the correct capital allowance
There are three different types of asset classes, each with their own rate of relief for which there is no limit to the amount you can claim. The government offers enhanced rates for some types of expenditure.
What expenditure qualifies for capital allowances relief?
When making a capital allowances claim there are different types and rates of relief available to your business depending on the class of asset you have invested in.
Examples of this expenditure are listed in the table below.
Types of expenditure that qualify for capital allowances relief
Plant and machinery
In the UK, plant and machinery for capital allowances includes a wide range of assets that businesses can claim deductions on. Common examples of eligible assets in this category include:
- Machinery and equipment.
- Commercial vehicles
- Furniture and fixtures.
Special rate items
Including: thermal insulation, electrical and illumination systems, alongside heating systems for both spaces and water.
Powered ventilation setups, air-cooling systems, elevators and pedestrian conveyors, cold-water installations, and external solar screening.
Structures and buildings
Capital expenditure on renovations, and conversions of existing commercial structures or buildings.
Repairs incidental to the conversion and or renovation of existing commercial structures or buildings.
Associated construction costs for new properties.
What are the different types of capital allowance?
There are three different types of accelerated allowances:
Annual investment allowance (AIA)
The annual investment allowance (AIA) is a UK tax provision that permits businesses to deduct a significant portion of their eligible capital expenditures from taxable profits in the year of purchase. As of September 2021, the AIA allows up to £1 million for investments made in new equipment, plant and machinery.
First year allowances (FYA)
First-year capital allowances are designed to encourage businesses to invest in energy-efficient and environmentally beneficial equipment and technologies. These allowances enable companies to deduct the entire cost of qualifying assets from their taxable profits in the year of purchase, providing a significant upfront tax benefit.
First year allowances typically cover assets that meet strict energy-saving and environmental criteria specified by the government. By offering this incentive, the government aims to reduce carbon emissions, promote sustainability, and encourage businesses to adopt more environmentally friendly practices.
Full expensing for general pool items represents a 100% initial-year allowance, enabling companies to deduct from their taxable profits an amount equal to 100% of their qualifying expenditure on general pool assets in the year when the expense is incurred.
To be eligible, the expenditure must be associated with the acquisition of general pool equipment and machinery on or after April 1 2023. However, several conditions must be satisfied, such as the equipment and machinery being brand-new and unused, not being a car, not being a gift to the company, and not being acquired for leasing to others (although corporate landlords may receive benefits for core equipment and machinery within a leased property).
Full expensing for special rate pool items attracts a 50% first year allowance for companies who spend money on qualifying assets within their properties such as air-conditioning, electrics and lighting.
The remaining 50% of expenditure attracts the usual writing down allowance annually through the usual pooling process.
How do you calculate a capital allowance claim?
Calculating capital allowances involves determining tax deductions for eligible assets like machinery or property. By understanding the rules and rates, businesses can reduce taxable profits, lower their tax liability, and optimise financial planning for long-term growth.
In this example, a pharmaceutical company carried out an extension and refurbishment of their laboratory space costing £12 million. Within the project there was an extension built onto the existing laboratory. The works schedule came to the company’s accountant and was split as follows:
Extension building works
Extension fit-out works
Existing laboratory refurbishment and fit-out works
New laboratory equipment
The accountant could see that the new laboratory equipment costs of £1,000,000 were general pool plant and machinery but did not have the expertise to categorise the other costs accurately.
A capital allowances specialist at ForrestBrown used their knowledge of construction and tax law to provide a detailed report reconciled to the fixed asset register that categorised the expenditure as follows:
- Laboratory equipment.
- Works to facilitate the installation of equipment.
Special rate pool
- Ventilation works
- Lighting and electrics
- Insulation to building fabric
- Heating and water supplies
Structures and buildings allowances
Based on these calculations, the pharmaceutical company claimed the following:
100% First year allowance
- Annual investment allowance
- Special rate pool expenditure
100% First year allowance
- Full expensing
- General pool expenditure
50% First year allowance
- Special rate allowance
- Remainder of the special rate pool expenditure
3% Structures and buildings allowances
- General building works
The total tax relief in the year was £6,440,000 with the remaining allowances being relieved over time through the relevant pools.
How do capital allowances interact with R&D tax relief?
Research and Development Allowances (RDAs), alternatively known as Research and Development Capital Allowances, empower companies to seek a full 100% deduction for their capital investments in R&D facilities, laboratories, plant and machinery, company vehicles for R&D personnel, IT infrastructure, or the renovation of development facilities against their corporate tax obligations. This unique provision frees up funds for businesses by immediately expensing all R&D-related investments in fixed assets within the first year.
RDAs complement your R&D tax credits application. While R&D tax credits are limited to expenses tied to revenue, pursuing an RDA claim will reward innovative businesses for incurring capital expenses in their R&D initiatives. Your R&D tax credits encompass operational outlays like personnel costs, subcontractors, and consumables, while your RDA claim caters to capital expenditures related to assets.
ForrestBrown’s capital allowances service
At ForrestBrown, we leverage our extensive expertise acquired from assisting innovative companies with R&D tax relief applications in our capital allowances service.
Our team includes chartered tax advisers, chartered accountants, and lawyers with direct experience form across a wide range of sectors including engineering, manufacturing and retail.
Collaborating closely with your finance and real estate teams, our experts serve as a vital link, guaranteeing the strength of your claims while discovering additional value.
Harness the full value of your capital expenditure
We deliver robust capital allowances claims that harness the full value of your capital investments.
ForrestBrown provides regular insights on incentives from across the innovation toolkit, including capital allowances, R&D tax relief, Patent Box and grants.