Capital allowances have always provided a valuable tax relief for businesses to enable them to reduce their taxable profits or increase losses for future benefit – both resulting in more cash in your business. Are you maximising your claims?
As a business, when you incur expenditure, it will either be capital or revenue in nature. Capital expenditure as a starting point is not deductible for tax purposes, however relief is provided by way of capital allowances. Capital allowances can be claimed on items which you keep to use in your business – plant and machinery (P&M). There are different types and rates of capital allowances, some of which are more favourable than others. It is important to note that generally the relevant assets must be owned by the business; any assets leased or under hire purchase have their own special rules.
The main allowances
Annual Investment Allowance (AIA)
Who can claim it?
Companies, sole traders and partnerships where all the members are individuals.
How does it work?
The AIA provides 100% tax relief on assets which qualify as P&M, subject to a cap of £1 million of total expenditure. When it was first introduced in 2010, the cap was only £50,000, however this eventually reached £1 million in January 2019 initially as a temporary increase, then becoming permanent and still stands today. If your business is in a group, you are only entitled to one AIA allowance.
First Year Allowances (FYA)
Who can claim it?
Anyone that can claim the AIA.
How does it work?
The FYA provides 100% tax relief on specific categories of expenditure (for example, electric or zero-emission cars), and there is no cap on the total amount of expenditure on which FYAs can be claimed. FYAs and the AIA can both be claimed, but not on the same expenditure.
Full expensing
Who can claim it?
Companies (including companies that are members of a partnership).
How does it work?
Full expensing provides either tax relief on qualifying plant & machinery – either 100% relief if it is main rate expenditure, or 50% relief in the first year if it is special rate expenditure. There is no cap on the total amount of expenditure on which full expensing can be claimed. The assets must be new and unused, and there are some assets that are excluded from the relief, for example cars.
Writing Down Allowances (WDAs)
No capital allowances article would be complete without a quick mention of WDAs. If expenditure does not qualify for AIA, FYAs or full expensing, or the AIA cap has been fully used, then WDAs enable your business to spread tax relief for the expenditure at a % rate every year (on a reducing balance basis).
Assets in the main rate pool attract a rate of 18% and the special rate pool (integral features) attracts a rate of 6%. It is important to pool your assets correctly to ensure you’re claiming the right rate of relief.
Property and capital allowances
Property and capital allowances has always been a complex area. If you are acquiring, building, fitting out or refurbishing commercial property, be sure to seek advice to maximise any claims. Claims are also possible for the communal areas in apartment blocks that are held as investments, or serviced apartments and furnished holiday lets held as investments. If you are buying a commercial property, take advice before the purchase.
As well as having access to the range of allowances previously mentioned, there are a couple of other additional mechanisms for relief when it comes to property:
Structures and Buildings Allowances (SBAs)
Who can claim it?
Companies, sole traders and partnerships that carry on a “qualifying activity” – this is broad and includes any form of trade and property business, as well as investment business.
How does it work?
SBAs provide 3% tax relief per year on a straight-line basis, on costs incurred in constructing or purchasing a building – including works on structures, walls and ceilings. These types of assets do not typically qualify for other forms of capital allowances.
The building must be used in the qualifying activity and must not be in ‘residential use’. When SBAs are claimed, this reduces the base cost of the property for Capital Gains Tax/Corporation Tax purposes when the asset is subsequently sold.
Land Remediation Relief (LRR)
Who can claim it?
Companies (including companies that are members of a partnership) that acquire contaminated or derelict land for the purposes of their trade or UK property business.
How does it work?
LRR provides an enhanced 150% tax relief on qualifying clean-up costs. It is available to developers, investors and occupiers, and for both commercial and residential property.
The aim of the LRR, which was first introduced in 2001, is to incentivise the regeneration of brownfield land over development of greenfield sites. The Government is currently running a consultation to assess how effective LRR is in achieving this aim (the last review having been undertaken in 2011).
Given the Government’s overall ambitions, and the importance of encouraging use of brownfield land, in order to meet these overall goals, it is unlikely that the LRR would be abolished entirely. However, the consultation also seeks a view on how robust the relief is against error and abuse. Changes could therefore be made to the LRR to make it more attractive to companies, and/or to tighten up the administration.
What now?
Access to capital allowances has always been valuable. But planning is key – before you undertake large items of spend, seek advice to ensure that any claims can be maximised, to reduce the amount of tax that you pay and increase cash flow.
If you would like further guidance, please contact Catherine Heyes.
