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Capital allowances

This article will give you an overview of capital allowances, what they mean for your business and the items that you may buy within your business that qualify for capital allowances.

What are capital allowances?

Capital allowances are a relief given by HMRC to businesses when the business makes capital purchases such as:

  • vehicles
  • machinery and
  • computer equipment.

The amount of allowance given depends on the type of asset purchased.

Capital allowances are tax deductible and therefore the greater the capital allowance in the current period, the lower your reported profits will be. Capital expenditure is deemed to be items purchased in the business which provides an ‘enduring benefit’ to the business. In other words, you expect to use for the long term – i.e 2 years or more.

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.

When can I claim a capital allowance?

You can claim capital allowances on items that you keep to use in your business – these are known as ‘plant and machinery’.

Buildings

Unfortunately, buildings and alterations to buildings are deemed to be changes to the setting in which your business trades from and therefore capital allowances are not allowed. In order to claim capital allowances, the item being purchased has to be performing a function. Some items within modern buildings, such as air conditioning units, are deemed to be integral features and do qualify for allowances. It’s worth speaking to a professional to discuss the allowances available.

Computer equipment

Computer equipment qualifies for capital allowances as these are deemed to be ‘plant and machinery’ and perform a function within the business. Where computer equipment has a particular short life you can elect to make a short life asset which effectively allows you to accelerate the allowances.

Cars and other commercial vehicles

Cars do qualify for capital allowances, where they are used in the business. Where there is private use then the allowance will be restricted each year, but only for unincorporated businesses as private use in a company is treated differently (under the benefit in kind rules). The rate of allowance on cars depends on the carbon dioxide emissions of the vehicle. Commercial vehicles such as vans qualify for capital allowances.

Machinery, equipment, fixtures and fittings etc

All of these qualify for capital allowances as all are deemed to perform a function within the business. The following counts as plant and machinery: 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’ e.g lifts, escalators, water heating systems, air conditioning units, electrical systems; Some fixtures, e.g fitted kitchens or bathroom suites, fire alarms and CCTV systems; Alterations to a building to install other plant and machinery – this doesn’t include repairs.
Buildings

Unfortunately, buildings and alterations to buildings are deemed to be changes to the setting in which your business trades from and therefore capital allowances are not allowed. In order to claim capital allowances, the item being purchased has to be performing a function. Some items within modern buildings, such as air conditioning units, are deemed to be integral features and do qualify for allowances. It’s worth speaking to a professional to discuss the allowances available.

Computer equipment

Computer equipment qualifies for capital allowances as these are deemed to be ‘plant and machinery’ and perform a function within the business. Where computer equipment has a particular short life you can elect to make a short life asset which effectively allows you to accelerate the allowances.

Cars and other commercial vehicles

Cars do qualify for capital allowances, where they are used in the business. Where there is private use then the allowance will be restricted each year, but only for unincorporated businesses as private use in a company is treated differently (under the benefit in kind rules). The rate of allowance on cars depends on the carbon dioxide emissions of the vehicle. Commercial vehicles such as vans qualify for capital allowances.

Machinery, equipment, fixtures and fittings etc

All of these qualify for capital allowances as all are deemed to perform a function within the business. The following counts as plant and machinery: 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’ e.g lifts, escalators, water heating systems, air conditioning units, electrical systems; Some fixtures, e.g fitted kitchens or bathroom suites, fire alarms and CCTV systems; Alterations to a building to install other plant and machinery – this doesn’t include repairs.

What is the annual investment allowance?

The annual investment allowance known as the AIA is an annual limit which HMRC set which effectively gives you a 100% allowance on the purchase of capital expenditure.

The AIA is set at £1m in 2024, and has been since 2019. This means that up to £200,000 of capital expenditure will attract 100% allowances in the period in which they are purchased which is fantastic for businesses and encourages them to invest in plant and machinery. Unfortunately, cars do not attract the AIA but integral features do.

Prior to 1 January 2019, the AIA was £200,000 per annum.

What are first year allowances?

First-year allowances (FYA) are available on energy efficient pieces of capital expenditure. The rate is 100% and is there to encourage businesses to purchase energy efficient pieces of capital expenditure.

What are writing down allowances?

Writing down allowances are the annual percentages that your assets qualify for.

Any capital items which qualify (see When can I claim a capital allowance? above) that do not attract the annual investment allowance (AIA) or first year allowances (FYA) will attract either 18% or 6%* each year (*decreasing from 8% from prior to April 2019).

Most of your ordinary plant and machinery will attract 18%; integral features and high emission cars attract 6% (a high emission car has carbon emissions of more than 110gm/km).

How do I claim a capital allowance?

When you’ve worked out your capital allowances, claim on your:

What date do I use for capital allowance purposes?

Usually, It is the date where the business has an unconditional obligation to pay i.e. the delivery date but there are different rules with hire purchase and assets purchased with long payment terms.

Do I have to claim capital allowances?

In short, no. AIA, FYA and the normal writing down allowances (WDAs) are optional. Capital allowances reduce profits but you don’t have to claim them. There may be situations where you would prefer to delay the claim to a later year e.g. if you have low profits below the personal allowance.

Is the maximum allowance I can claim on a car 18% each year?

No, if you are able to buy an energy efficient car i.e. one with low emissions, you can claim 100% in the year of purchase. The threshold is currently is 75gm/km or less.