Capital allowances are a form of tax relief for expenditure incurred on fixed assets. These allowances are given for expenditure on assets otherwise known as "plant and machinery" as a tax allowable expense therefore reducing taxable profits and saving money.
Items that qualify as "plant" and subsequently tax relief under CAA2001, S23, list c is by no means definitive and each asset is analysed on an individual basis.
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Capital Allowances Explianed
"The average capital allowances claim is worth £160,000 and in most cases a HMRC tax refund is due"
Who Can Claim
Owner Managed Businesses
UK Tax Payers (income and corporation tax)
Who Cannot Claim
Property Developers (if property held as stock)
How Capital Allowances started
Until 1878 there were no capital allowances although there were deductions for expenditure incurred when renewing or replacing existing Plant and Machinery (P&M).
In 1878 a Wear and Tear allowance was introduced; the Wear and Tear (W&T) allowance acknowledged the diminished value of Plant and Machinery used for trade purposes. The amount allowed for deduction was deemed to be considered what was "just and reasonable". A similar deduction based on annual value was available for expenditure on mills and factories (the Mills and Factories allowance). These deductions gave tax relief for an amount broadly equal to the actual economic depreciation suffered.
The Finance Act 2008 reforms
The capital allowances changes introduced in FA2008 represented the biggest reform of the capital allowances system since the 1980s. The changes were part of a wider ‘Business Tax Reform’ package which included a 2% cut in the main rate of corporation tax. The reforms had three main objectives:
To promote investment and growth
To reduce distortions and complexity, and
To maintain fairness and refocus the tax system for smaller businesses.
The main Capital Allowances changes were:
The introduction of a new Annual Investment Allowance (AIA); which effectively is a 100% allowance for business expenditure on Plant and Machinery (excluding from cars). The AIA applies to businesses regardless of size, and replaced the previous 40% or 50% FYAS for small and medium-sized businesses only.
Small Pools Allowance; allowing pools of P&M expenditure of £1,000 or less to be written-off immediately.
Payable tax credits for businesses that make losses attributable to investment in environmentally beneficial P&M.
Phased withdrawal of industrial and agricultural buildings allowances (by 2011).
Changes to the rates of Capital Allowances on P&M from 25% to 20% (main pool) and from 6% to 10% (long life assets re-categorised in the new special rate pool. NB: WDA rates are currently 18% and 8% respectively.
New classification of Integral Features of a building or structure to apply to new and replacement expenditure and which will attract 10% allowances in the special rate pool. NB: Special rate now 8% as above.
Industrial Buildings Allowance (IBA)
The Industrial Buildings Allowances (IBA) also replaced the Mills and Factories Allowance; the main features were an Initial Allowance of 10% for new buildings for the first year was introduced to encourage investment, the annual rate of Writing Down Allowance was set at 2%. Balancing Adjustments were applicable under this scheme.
Sales after April 2014
Sales after 1 April 2014 for Corporation Tax or 6 April 2014 for Income Tax
The buyer of a building that contains fixtures, can only claim plant and machinery allowances (PMA) if the expenditure on the fixtures is pooled before the sale.
The seller and buyer must also either:
formally agree a value for fixtures within 2 years of a transfer
start formal proceedings to agree the value within that time
1 April 2012 to 31 March 2014 for Corporation Tax and 6 April 2012 to 5 April 2014 for Income Tax
The seller didn’t need to pool the expenditure but needed to agree the value with the buyer.
This is known as the fixed value requirement. It only applies where the past owner is required to bring in a disposal value for the fixtures when the property is sold.
The value of the fixtures can be fixed by:
making an election
applying to a tribunal to decide what part of the sale’s proceeds relate to the fixtures
the preservation of allowances (where an intervening owner can’t claim PMA for the fixture)
If the fixed value requirement isn’t satisfied because you haven’t made an election or applied to a tribunal, the current owners (the buyer’s) qualifying expenditure is counted as nil. In these cases the buyer or any future buyer won’t be able to claim PMA on the fixtures.
The past owner (the seller) must still bring in a disposal value.
In most cases, you’ll satisfy the fixed value requirement when the current owner and past owner make an election.
A receiver can’t make an election on behalf of either the buyer or the seller.
You should use the election procedure to make an election in writing to HM Revenue and Customs (HMRC),
It must contain:
the amount fixed by the election
the name of each person making the election
enough information to identify the fixture and the relevant land
details of the interest gained by (or the lease granted to) the buyer
the tax district references of each person making the election
The election is permanent and cannot be changed after it has been made.