What qualifies for capital allowances & who can claim them?

If you buy equipment, machinery, or business vehicles to carry out your work / business you may be able to claim capital allowances. None of these are tax deductible expenses but you will be able to claim tax relief on them in the form of capital allowances. In this blog, we explore all you need to know about capital allowances.

What are capital allowances?

A capital allowance is expenditure that your business can claim against it’s taxable profit for the capital assets purchased for the use in the business.

Who can claim capital allowances?

Sole traders, partnerships and limited companies are all entitled to claim for capital allowances. Any type of business that is spending money on items that are allowed as ‘qualifying expenditure’ (see list below).

If you’re a sole trader or partner and have an income of £150,000 or less a year, you may be able to use a simpler system called cash basis instead.

PAYE employees can also claim capital allowances. Many people think that employees don’t qualify. But for example: If you’re an employed builder and you need to buy tools and equipment to perform your duties, then your tools can be classed as plant & machinery, and they can claim capital allowances on the value of their qualifying purchases. The builder will pay their normal tax but would be due a tax refund/rebate on their tools.

What qualifies for capital allowances?

You can claim capital allowances when you buy assets to use in your business, for example:

• equipment.
• machinery.
• business vehicles, for example cars, vans, or lorries.

These are known as plant & machinery. Generally, any asset that has a useful life of 2 years or more and has a function for the business will qualify as plant.

Plant & machinery includes:

• items that you keep to use in your business, including cars.
• costs of demolishing plant and machinery.
• parts of a building considered integral, known as ‘integral features’.
• some fixtures, for example fitted kitchens or bathroom suites.
• alterations to a building to install other plant and machinery - this does not include repairs.

Integral features include:

• lifts, escalators and moving walkways.
• space and water heating systems.
• air-conditioning and air cooling systems.
• hot and cold water systems (but not toilet and kitchen facilities).
• electrical systems, including lighting systems.
• external solar shading.

Fixtures include:

• fitted kitchens.
• bathroom suites.
• fire alarm and CCTV systems.

Note that you cannot claim if you rent or own the building, only the person who bought the item can claim.

Qualifying expenditure can arise on:

• the acquisition of a building.
• the construction of a new building.
• the extension, alteration, or refurbishment of an existing building; and.
• leasehold improvements to a rented property.

Buying a building

If you buy a building from a previous business owner, you can only claim for integral features and fixtures that they claimed for. You cannot claim for the cost of the building as it isregarded as a place of setting in which the business is conducted and therefore are not plant.

You must agree the value of the fixtures with the seller and ensure they have pooled all the fixtures eligible for capital allowances. If you don’t you cannot claim for them. Agreeing the value also means the person selling the assets can account correctly for them.

Also See: Capital allowance for new structures and buildings

If you let residential property

You can only claim for items in residential property if either:

• you run a furnished holiday lettings business.
• the item is in the common parts of a residential building, for example a table in the hallway of a block of flats.

What doesn’t qualify as plant & machinery?

You can’t claim capital allowances on:

• things you lease - you must own them.
• buildings, including doors, gates, shutters, mains water and gas systems.
• land and structures, for example bridges, roads, docks.
• items used only for business entertainment, for example a yacht or karaoke machine.

What are the capital allowance rates?

The normal allowance is a writing down allowance (WDA) of 18%, or a special pool writing down allowance of 6%.

However,there is a much better allowance available called the annual investment allowance (AIA).

Please note, the WDA rate of 18% or 6% is applicable for a 12-month accounting period. Therefore, where a business has an accounting period which is not 12 months long, this rate must be adjusted as appropriate.

Annual investment allowance (AIA)

The annual investment allowance (AIA) can be used for plant and machinery (subject to an annual maximum & excluding cars) and allows for 100% of the cost to be taken from you profits before tax. You can only use the AIA in the year that you buy the asset. If you are claiming capital allowances as an employed person this would normally be the way you would claim.

The AIA amount has temporarily increased to £1 million between 1 January 2019 and 31 March 2022.

The AIA amount has changed several times since April 2008. If the AIA changed in the period you’re claiming for, you need to adjust the amount you can claim. Find out the amounts for different years on HMRC website.

First year allowances (FYA)

You can claim first year allowances in addition to annual investment allowance - they do not count towards your AIA limit. For example – fully electric cars and electric vehicle charging points qualify for FYA

To find out what qualifies for ‘enhanced capital allowances’ (a type of first year allowance) visit the HMRC website.

Research and development allowances (RDAs)

Research and development allowances (RDAs) are a tax relief for businesses incurring capital expenditure on qualifying R&D activities.

If you are spending on capital assets that are used for R&D activities, you could receive 100% tax relief. There is no limit to the amount you can claim, unlike the Annual Investment Allowance.

Qualifying expenditure for RDAs includes the cost of purchasing capital equipment and other assets for use in R&D activities. But it also includes expenditure on providing facilities for carrying out R&D. This could be building, extending, refurbishing, and sometimes purchasing property in which R&D activities take place.

Super deduction

The Spring 2021 budget introduced a new relief under the capital allowances regime called the super deduction. The relief is available to companies that incur expenditure on qualifying new plant and machinery (P&M) between 1 April 2021, and 31 March 2023. Find out more about super deduction here.

How to claim capital allowances

Get your accountant or tax advisor to work out your qualifying expenditure and what to claim and then you can claim on your:

• Self-assessment tax return if you’re a sole trader.
• Partnership tax return if you’re a partner.
• Company tax return if you’re a limited company - you must include a separate capital allowances calculation.

Employees must claim usually through self-assessment or by completing a P87 form.

When you claim capital allowances

You must claim in the accounting period you bought the item if you want to claim the full value under:

• annual investment allowance.
• first year allowances.

If you do not want to claim the full value, you can claim part of it using writing down allowances. You can do this at any time if you still own the item.

Capital allowances timescales

The timescale depends on whether you have completed a self-assessment tax return in the year of claiming. If you completed a self-assessment tax return you need to include any capital allowances on your tax return in accordance with the normal self-assessment deadlines.

You have one year from the filing date to amend your tax returns to claim the capital allowances. So, for 2019/20, the last date for claiming capital allowances is 31 January 2022.

Companies have 2 years from the end of their accounting period to claim capital allowances.

For a PAYE claim, you can claim capital allowances at a date you choose but if it’s not claimed within the last four tax years you will lose the option to claim 100% of an assets value in the year it is bought.

Claiming capital allowances really could be of benefit to you and your business. If you want to know more or find out if you have qualifying expenditure or how much you could claim, then contact us today.

Also See: Claiming capital allowances on purchase of commercial properties

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.