For most businesses, acquiring assets is an important part of the growth journey. From equipping a brand new office to expanding your plant machinery fleet to meet customer demand, businesses generally have to spend money to make money.
Fortunately, due to a scheme known as capital allowances, spending money on your business isn’t just a good idea – it’s actively encouraged by the government. If the assets you buy qualify for capital allowances, you can offset their cost against your taxable profit – slashing your overall tax burden. Depending on the type of allowance you utilise, your tax saving may be immediate or spread across multiple years.
Assets, of course, vary wildly in size, scope and cost. As a result, not all asset purchases will qualify, and what does and doesn’t changes depending on your industry. To make matters more confusing, HMRC regularly modifies the capital allowance system.
Capital allowances can sometimes negate your entire corporation tax liability, so you can’t afford not to know all about the scheme and how it works. Understanding the capital allowance scheme, which of your business’ purchases qualify, and how you can claim is too important to ignore.
Don’t worry - we’ve made the whole thing simple with this useful guide. If you’ve got any questions after reading it, get in touch with our expert accountancy team today to ask about reducing your tax liabilities.
Please note: there are many different types of tax relief available to individuals and businesses. Capital allowances are just one type of relief – though there are many categories of allowance. For a full overview of each type of relief available in the UK, read our guide here.
Understanding capital allowances
A business has two types of expense: revenue expenditure and capital expenditure, with the latter referring to purchases, such as a suite of new computers, that will have a long-lasting effect on the business.
A ‘capital allowance’ provides tax relief on capital expenditure. Only expenditures on certain types of assets can be used against these allowances. When they do qualify, however, the value of the asset can be used to reduce your taxable profits.
In many cases (when eligible for full expensing, AIA or FYA), capital allowances give you the ability to deduct up to 100% of the cost of an eligible asset from your taxable profits, significantly reducing corporation tax.
Capital allowances incentivise businesses to invest in themselves over a longer term, which benefits the UK economy. As the Spring Budget 2023 revealed, the government is committed to expanding which types of purchases qualify as capital allowances, further encouraging businesses to grow.
Eligible expenditure and types of capital allowance
So what qualifies as a capital allowance? The most commonly utilised category for capital allowances is plant and machinery, but this term is misleading, as we’ll soon discuss. In addition, there are other categories of expenditure which qualify for certain types of capital allowance. These include:
- Plant and machinery
- Extracting minerals
- Research and development
- Patent rights
- Structures and buildings
Plant and Machinery Allowances
The main category of asset to which capital allowances apply is defined as ‘plant and machinery’, which includes the following:
- Business vehicles
However, this term is misleading and often leads to businesses failing to utilise capital allowances to full effect. The ‘Plant and Machinery’ term does not inherently dictate industrial or construction-specific equipment. Instead, it refers to any apparatus, features or fixtures used by a business which must be engaged in a qualifying activity.
In effect, this means almost all businesses will have incurred some form of qualifying plant and machinery asset purchases – whether that’s a suite of new computers or integral features like
air conditioning, water heating systems etc.
Types of capital allowance used in plant and machinery
Certain types of capital allowance can be used within this category. These are:
- The Annual Investment Allowance, or AIA, lets you claim 100% of a qualifying asset's cost (up to £1m) in the year you purchase it.
- Writing Down Allowance, or WDAs, enable you to spread tax deductions over time at 18% and 6% per year for main rate and special rate expenditure.
- First-Year Allowances, or FYAs, let you claim a percentage of the cost in the first year of purchase.
- Structures and Buildings Allowances, or SBAs, allow you to deduct 3% per year over 33 and ⅓ years for qualifying expenditure on non-residential structures.
Full expensing for plant and machinery
As of April 2023, a new capital allowance scheme known as Full Expensing is in effect. This scheme replaces an older one called Super Deduction and is most likely the one you’ll use if your business is able to. To be eligible, your capital expenditure must be within the eligible plant and machinery category, and you must pay corporation tax. If your asset qualifies under Full Expensing, you can claim a 100% FYA against the cost of purchase.
This is a massive benefit, as it allows you to not only save on tax, but effectively recoup some of the purchase cost of the asset. Take, for example, a company profiting £1m in the 2023-24 tax year. Under new corporation tax rules, their tax bill would be £250,000. The business purchases a £1m warehousing automation system and claims 100% of this cost under Full Expensing. This would reduce their tax liability to zero – representing a saving of £250,000 that can be used to reinvest in the business.
Special rate pool allowances
Some assets might not qualify for any of the above reliefs, but may be eligible for ‘special rate pool allowances’. These are long-life, integral assets such as ventilation and heating systems. Rather than applying a large reduction in the first year, you can instead assign a 6% writing down allowance, granting small tax savings each year they’re in effect.
Expenses incurred during the extraction of minerals often fall within capital allowances. Expenditure such as site restoration, reimbursed exploration costs and license payments are generally eligible. This is a fairly niche area that tends to apply mainly to businesses in the oil industry, but may also apply to gravel and sand extraction. Note that expenditure on machines and equipment etc would fall instead within Plant and Machinery allowances.
Structures and buildings allowances
If you have paid towards the purchase, construction or renovation of a structure, you may be able to claim capital allowances against the expenditure. To qualify, you need to meet certain criteria:
- The construction contracts must have been signed no earlier than the 29th of October 2018.
- The structure can’t be used as a residence the first time it is used or during the period you claim for
- The structure must be used for a qualifying activity:
- Trades, professions and vocations
- Managing investments
- Mining, quarrying, fishing or land-based trades
- Operating a UK or overseas property business (except for residential and holiday lettings)
The actual costs you can claim for include fees for design, site preparation, the construction project itself and any fitting-out works. Even if you don’t own the freehold and lease the building, if you spent money on its construction you can claim.
You can claim allowances against corporation tax and income tax. From April 2020, that rate has been 3% for both types. As with most other forms of capital allowance, you can claim this on your self-assessment tax return or company tax return.
Land Remediation Relief
While it does not apply to most businesses, land remediation relief allows you to offset 100% of the cost of cleaning up contaminated land, or a further 50% relief for cleaning up land acquired by a third party. It only applies to land where the contamination is a result of industrial activity and presents a risk of harm or pollution.
Though it’s a niche relief to use, it may be useful for industrial businesses which specialise in remediation or site preparation. Read the government’s guidance on the topic to learn more.
Capital allowances for vehicles
You may have noticed that vehicles were part of the ‘plant and machinery’ category earlier. However, the concept of claiming capital allowances against work vehicles is so popular it needs its own section.
Capital allowances do apply to business cars, but there are specific criteria involved in working out what type of allowance you can claim and how it works. The vehicle must be a car, not a motorcycle, lorry, van or truck and must be suitable for private use, not built for transporting goods, and used most of the time privately.
Your employment status also impacts how you can claim:
- Sole traders and people in partnerships can’t claim for the cost of a car but can claim for simplified mileage expenses.
- Employees can’t claim capital allowances against a car, but they can claim business mileage.
- Businesses can claim for one of the following, depending on the car’s CO2 emissions and when you bought it:
- 100% of the car’s value as a first-year allowance
- 18% as a main rate
- 6% as a special rate
As we mentioned at the start of this guide, the government often uses capital allowances to direct businesses in a certain way. This is just as true with cars, where the 100% allowance is now only available for electric vehicles or cars with low CO2 emissions.
Consult the government’s reference table to work out which allowances apply to your business vehicles.
Capital allowances for residential property owners
Whilst structures and buildings allowances are reserved for non-residential buildings, residential property owners can still benefit from other types of capital allowances.
To leverage allowances, you must have a property business which owns the assets you claim against. These assets must be for business usage rather than tied to a particular property. As a property business, you have access to many of the same capital allowances we’ve listed in this guide. For example, you could claim for computers used in your office under plant and machinery allowances.
Ultimately, provided the expenditure isn’t being used to improve or alter a specific residential property and is instead used for your business, it may qualify under capital allowances.
Claiming capital allowances
Claiming capital allowances depends on your circumstances and the expenditure you want to claim against. In most cases, you’ll either complete a self-assessment tax return, a partnership tax return or a company tax return. If completing a company tax return, you must complete a separate capital allowances calculation.
If you want to claim the full value of an asset under a scheme like Full Expensing or AIA, you’ll need to claim it in the accounting period in which you bought the item. Alternatively, you can use writing down allowances at any time, provided you still own the item.
As HMRC expects you to have accurate receipts for your asset purchases, the importance of keeping receipts and tracking spending in your business can’t be overstated.
Maximising capital allowances: tips and advice
Provide tips on how to maximise capital allowances claims
Discuss the benefits of seeking professional advice on capital allowances
Automatic tax efficiency with Crunch
Capital allowances are just one of the ways to reduce your corporation tax liability and make your limited business more efficient. Take advantage of our innovative limited company accountancy software to track your liability and expenditure, all in one easy system with full support from expert accountants right at your fingertips.
Frequently Asked Questions
Who can claim capital allowances?
Most people can claim some form of capital allowance, though generally the more significant reliefs are reserved for businesses that pay corporation tax.
Can capital allowances increase a loss?
Yes - a loss-making business must be careful if planning to utilise capital allowances, as the offset will increase your losses.
Can capital allowances be carried forward?
Some capital allowances can be carried forward into further tax years, though doing so means you will miss out on the 100% first year AIA or FE allowance.