Capital allowances offer a vital tax relief to businesses for the amount of capital expenditure they can claim as a deduction against taxable profits. They can be claimed on the purchase of many assets for use in the business, and the classification of such assets will determine the extent to which a deduction can be taken.
Which assets qualify for capital allowances?
Examples of assets qualifying for capital allowances include:
- Certain fixtures and fittings
- Business vehicles
These items are generally known as plant and machinery.
Other examples of qualifying assets include:
- Electrical systems and wiring
- Cold water systems
- Central heating systems
- Air conditioning systems
These items are generally known as integral features.
The following items, however, would not be classified plant and machinery or integral features:
- Things you lease – you must normally own them
- Buildings (including doors, gates and shutters)
- Land and structures
Ways to claim capital allowances
The two most common ways in which capital allowances can be claimed are the Annual Investment Allowance (AIA) and Writing Down Allowance (WDA). There is also a third way to claim called the First Year Allowance (FYA).
Annual Investment Allowance (AIA)
AIA allows businesses to deduct the full value of certain items (generally plant and machinery and integral features), up to the limit of the allowance. Some types of assets, such as cars, are not eligible for AIA. Therefore, a business may only claim tax deductions in these cases by utilising the WDA.
Writing Down Allowance (WDA)
Where a business has already claimed the full limit of AIA on qualifying expenditure in a year, it can use a WDA for further deductions from taxable profits. A WDA enables a business to deduct a percentage of the value of an item from its taxable profits each year. Such assets are put into a pool, with a percentage of that pool being deducted from taxable profits each year.
First Year Allowance (FYA)
A third way to claim capital allowances is the First Year Allowance (FYA). This is available over and above the standard AIA amount for certain specific assets purchased by a business, and the deduction may only be made in the year of purchase. Assets eligible for the FYA are energy/water efficient assets, including certain types of cars with low CO2 emissions, energy/water saving equipment, and zero emissions goods vehicles.
Updates to capital allowances from the Autumn Budget
The Autumn Budget (2018) announced some key changes to capital allowances, including the rates for claiming the WDA and the amount of AIA available.
Special rate pool expenditure (such as integral features, thermal insulation and cars with high CO2 emissions) was previously eligible for a WDA of 8%. However, the rate was reduced from 8% to 6% for expenditure incurred on or after 1 April 2018, and the emissions threshold at which a car will be treated as special rate expenditure has decreased from 130g/km to 110g/km.
The WDA on main pool expenditure (such as plant and machinery, office equipment and certain fixtures and fittings) is currently 18% and is unchanged.
For businesses whose chargeable period spans 1 April (Corporation Tax) or 6 April (Income Tax), a hybrid rate (based on the proportion of a chargeable period falling before and after the rate change) will be used for unrelieved expenditure in the special rate pool.
The AIA has been increased from £200,000 to £1,000,000 for all qualifying investment made on or after 1 January 2019. This movement aims to try incentivise and stimulate business investment. If your accounting period straddles 1 January 2019, and you expect to incur significant capital expenditure, you may wish to consider the timing of that expenditure to ensure the AIA is maximised.
Structures and Buildings Allowance (SBA)
A Structures and Buildings Allowance (SBA) has recently been introduced for expenditure incurred on non-residential structures and buildings, where previously no relief was available. The SBA is available on eligible construction costs incurred on or after 29 October 2018 at 2% per annum and is somewhat similar to the Industrial Buildings Allowance, for those of you old enough to remember!
The relief is limited to the original cost of construction and will be available on a straight-line basis over a period of 50 years. Furthermore, SBA expenditure does not qualify for the AIA, and both integral features and plant and machinery fixtures within a structure or building will continue to qualify for relief separately under the existing rules.
Should you require any advice regarding capital allowances, please do not hesitate to get in contact with the tax team at Murray Harcourt.