Capital Allowances

What are Capital Allowances?

Expenditure incurred by a business is either capital or revenue in nature. Revenue expenditure is generally in relation to repair works, whilst capital expenditure is most typically on items which provide a lasting benefit for the trade of a business. This expenditure is usually not deductible from trade profits, so a form of tax relief is obtained by way of Capital Allowances.

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What qualifies for Capital Allowances?

Capital Allowances are available on expenditure incurred on the provision of plant and machinery. Therefore, allowances would be available to businesses that have incurred capital expenditure on their commercial real estate. Qualifying projects would typically include property developments, acquisitions, fit-outs and refurbishments. Since October 2018, to further enhance the regime, tax relief was introduced for expenditure incurred on qualifying expenditure for structures and buildings (SBAs).

How to claim Capital Allowances

Capital Allowances are not provided automatically and must be claimed in a tax return. However, there is no restricted time limit on claiming, so if the asset is still owned and utilised within the trade, a Capital Allowances claim can be made.
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What is the rate of relief?

Tax relief on qualifying plant and machinery expenditure is provided at 18% (main rate pool) or 6% (special rate pool), on a writing down basis, depending on the item. Assets qualifying for main rate pool include furniture, telecoms, computing equipment and associated items. Assets qualifying for special rate pool include electrical, ventilation and cold water installations.

Tax relief available on qualifying SBA expenditure is provided on a 3% straight line basis.

Enhancements to the Regime

Super Deduction and Full Expensing are two schemes within Capital Allowances that can be utilised to maximise tax deductions and reduce corporate tax liability.

Super Deduction was introduced in April 2021 to stimulate economic growth, and allows businesses to deduct 130% of the costs of certain assets from their profits, rather than the standard 100%. This can lead to further tax deductions and allows businesses to minimise the amount of corporation tax payable. The Super Deduction period ended in April 2023, meaning that any business that has incurred expenditure within this period should seek the expertise of a Capital Allowance specialist, to ensure that their tax liabilities are fully optimised by making use of this scheme. 

Following Super Deduction, this scheme was replaced by Full Expensing from April 2023 onwards. Full Expensing allows businesses to deduct 100% of the cost of qualifying capital expenditure within the same year, and is aimed at optimising businesses’ tax liabilities and further incentivise investments in capital assets. Unlike the Annual Investment Allowance, which currently only has a limit of £1 million that can be deducted within the same year, Full Expensing does not have such a limit, which enables businesses to realise greater upfront savings. In the Autumn Statement of 2023, the government announced that Full Expensing would be made permanent, which is great news for businesses looking to invest in capital assets going forward. As with Super Deduction, any business currently investing in capital assets should reach out to a Capital Allowances specialist, to maximise the use of this scheme and greatly increase the upfront savings that can be identified.

Capital Allowances claim process

The below process is flexible and can be adapted based on a client's preferences as to their involvement within the process.

Step 1: Scoping Call

Step 2: Entitlement Check

Step 3: Review Property Documentation

Step 4: Financial Analysis

Step 5: Site Survey

Step 6: Submission to HMRC

Capital allowances tax relief

Information Required

For development projects:

Cost breakdowns on the works undertaken (usually held within a Contract Sum Analysis and Final Account document)
Project fixed asset ledger

For acquisitions:

Sale and Purchase Agreement (SPA)
Property valuation report
Commercial Property Standard Enquiries (CPSEs)
Completion Statement
Building survey report

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