What are capital allowances?

‘Capital allowances’ is the official term for the tax reliefs you can claim when you buy equipment, cars, buildings and other assets that you use in your business. The amount you spend is the amount that can qualify for tax relief.

Who can claim capital allowances?

Pretty much every UK business that pays tax, including sole traders, partnerships and companies.

We work with every sort of business across multiple industries including landlords & real estate investors, restaurateurs, retailers, hoteliers, care home operators, football clubs, dental practices, garden centre owners, nurseries, motor dealerships & workshops, wind farms and whisky distilleries.

If your business is spending money on equipment, buildings and assets used for the purposes of its taxable business, then capital allowances are very likely to be available.

Specifically, what assets can qualify?

There is no definitive list of what qualifies, but below are the most common examples:

  • Building fixtures:
    • Fire alarms
    • Sanitaryware
    • Fixed furniture, kitchens and bathrooms
    • Electrics and lighting
    • Telephone and data cabling
    • Boilers, hot and cold-water pipework and radiators
  • Building fabric:
    • Foundations
    • Walls
    • Floors
    • Doors
    • Ceilings
    • Windows
    • Roofs
  • Cars
  • Vans
  • Computer equipment
  • Manufacturing and processing machinery

Money spent on the above would qualify but there are different forms of allowance available, depending on what type of asset you’ve spent money on.

And what doesn’t qualify?

There are several exclusions including:

  • You must own the freehold or have a lease to claim on property and fixtures spend
  • For landlords, no claims are possible on residential properties
  • If you are a developer, rather than an investor, you cannot claim
  • Expenditure on land

How are capital allowances claimed?

In your personal or your businesses tax return.

For example, if you spent £50,000 on new equipment (such as computer hardware or software, factory or process machinery, fire alarm systems) used for your business, you could claim a £50,000 'full expensing' deduction in your tax return against your business income, just like you are allowed to deduct expenses such as paying a staff member, paying utility bills or rent. This reduces your taxable profit by £50,000, saving £12,500 in tax (at the corporation tax rate of 25%).

This a pretty modest example. Our case studies show examples of the types of usinesses, from £100,000 refurbishments of offices and shops to multiple million pound acquisitions and construction projects, identifying £100,000s if not £1,000,000s of tax relief for our clients.

What are the different types of capital allowance available?

This is where capital allowances can get complex; there are many types available!

You need to know when you spend money on an asset what it can qualify for, and this is set by a combination of tax legislation and case law. This is where Tallex really can add value to our clients, ensuring that their claims are both correct, robust and maximised.

The main two allowances are Plant and Machinery Allowances, for all the equipment you use in your business, and Structures and Buildings Allowances.

There are then more specialist forms of allowance available for businesses spending money on certain assets or in certain sectors, such as Contribution Allowances where you are contributing to someone else’s spend and Research and Development Allowances when you have R&D facilities.

Plant and Machinery Allowances

The most common and widely claimed form of allowance, available for spend on equipment and building fixtures & fittings used by the business.

Plant and machinery allowances are claimed at two different rates year by year: 18% and 6%.

The 6% ‘special rate’ plant and machinery includes assets with a life of over 25 years, solar panels and longer life building fixtures such as heating, thermal insulation, hot and cold water, air conditioning, electrics and lighting and lifts.  As these assets have a longer life, they are claimed every year at 6%, a slower rate than other plant and equipment.

Everything else falls into the 18% ‘main rate’ and is claimed at 18% every year until it’s gone.

However, rather than claiming 6% and 18% every year, there are ways of accelerating the claims instead by using:

  • Annual Investment Allowance (AIA) – AIA allows you to claim 100% of your spend on plant and machinery in the year incurred up to £1m. It can be used on both new and second hand plant and machinery, either main rate or special rate. You do share AIA with connected companies and in your group though.

  • Full Expensing – Full expensing is an alternative to AIA. Main rate plant and machinery can be claimed at 100% and special rate plant and machinery at 50%, with the other 50% claimed as normal at 6% every year over time. It is uncapped however is only available to companies, only for new and unused plant and equipment and can have some nasty clawback rules if you sell the equipment in future (basically the amount received is taxed like profit).

Contribution Allowances

If you contribute to someone else’s spend on plant and machinery or structures and buildings, you can claim the allowances instead of them.

Your claim will mimic what would have been available to the person you’ve contributed to: so, if you gave them £100,000 for main rate plant and machinery you could claim this at 100% under AIA or full expensing or 18% every year until it’s all claimed.

Giving a landlord the ability to claim on contributions can be useful for tenants. By forgoing allowances, a tenant does not need to treat the contribution as taxable, it can be treated as tax free cash.

Structures and Building Allowances (SBA)

Can be claimed for spend on building fabric, like doors, walls and floors, and structures that are not business equipment or fixtures.

SBA is claimed at 3% every year over 33 years. There is no way to accelerate SBA claims, it can only be claimed at the 3% rate. The claim starts when you bring the building into use and stops when you stop using it.

Research and Development Allowances

Different from R&D, but they do go hand in hand. RDAs are available for businesses carrying on R&D that spends money on equipment and facilities, such as offices, laboratories or factories where R&D is carried out.

It’s another way to accelerate claims, again at 100%. Uniquely, this can also be for buildings and claimed instead of Structures and Buildings Allowances.

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