Capital Allowances

Changes coming into force in January 2016

Capital allowances are the tax equivalent of depreciation.

For example, a business buys a machine for £10,000 and believes the machine has an estimated useful working life of 10 years. The business may choose to depreciate the asset at the rate of £1,000 per year until it has a net book value of zero after 10 years.

Depreciation is generally not allowed for tax purposes and therefore any depreciation in the accounts must be added back which will increase taxable profits. Instead, you may be able to claim capital allowances.

Claiming capital allowances

In practice, most capital allowances are claimed in relation to plant and machinery. However, capital allowances can also be claimed for:

  • Renovation of business premises
  • Research and development
  • Mineral extraction
  • Patents and know-how
  • Dredging
  • Cemeteries & crematoria.

Capital allowances are not available on land and buildings, however certain fixed plant and machinery within a building may be eligible.

The government has also announced that there will be some special capital allowances for enterprise zones in assisted areas.

Defining plant and machinery

Machinery is any device with moving parts. It does not have to be connected to any form of power. For example, a locking mechanism is machinery.

Plant is equipment which a person uses to conduct their business. It does not include the premises in which a person conducts their business. This has led to some fine distinctions;

Plant must have an expected life of at least 2 years and be required for the functions of the business. Some small items, such as replacement loose tools, may be regarded as revenue expenditure. This means that you are able to claim tax relief immediately and not over many years.

The exact scope of what comprises plant can at times be very marginal yet have a big impact on the tax you pay. If expenditure qualifies for capital allowances you will receive tax relief on the whole amount, albeit over many years. If an item does not qualify for capital allowances it can mean that you do not receive tax relief for it at all.

Annual investment allowance

There is an annual investment allowance (AIA) which may be claimed against most forms of allowable plant and machinery. The main exceptions are for ordinary cars and plant and machinery purchased during a final trading period. The allowance is currently £500,000 but is set to be reduced to £200,000 for expenditure incurred on or after 1 January 2016.

You can find further details and information in our Guide to Capital Allowances

Or contact our Tax Manager - Natalie Staples-Vvind on 0845 365 1000