Capital Allowance

A capital allowance is the amount of expenditure that a British business may claim against its taxable profit under the Capital Allowances Act. It is regulated by HM Revenue & Customs (HMRC). Capital allowances may be claimed on most assets purchased for use in the business, and the classification of these assets determines whether full or partial value can be claimed.

A business can claim capital allowances when it purchases any assets for that business including equipment, machinery or any type of vehicle including cars, vans and trucks. These are known as plant and machinery. Some or all of the value of the items can be deducted from the company’s profits before paying taxes. Other capital allowances include research and development (R&D) costs, patents and renovations to business premises. The following cannot be claimed as capital allowances: leased items (items must be owned), buildings (including doors, gates, shutters, water and gas systems), land and structures (bridges, roads, docks) and any item used for business entertainment purposes such as a boat or entertainment system. 

The two most commonly used types of capital allowances available to businesses are the Annual Investment Allowance (AIA) and Writing Down Allowance.

The AIA allows businesses to deduct the full value of most items used solely for business purposes, up to the limit of the allowance. The maximum amount of AIA is £200,000. The tax deduction is claimed in the same taxation year as the item is acquired. Most plant and machinery can be claimed under the AIA except for items purchased before they were used in the company, cars and anything gifted to the business.

A writing down allowance is a type of capital allowance that enables a business to deduct a percentage of the value of an item from their profits each year.

A third type of capital allowance is the First Year Allowance. This type of capital allowance is also referred to as an "enhanced capital allowance." It is available over and above the standard AIA amount for certain assets purchased by a business. The deduction may only be made in the year of purchase, hence the name "first year allowance." The items eligible for the first year allowance must be classified as energy- or water-efficient equipment, which includes certain types of new cars with low CO2 emissions, energy and water saving equipment, and new zero emissions goods vehicles.

In the cases where a business has already claimed the full limit of the Annual Investment Allowance (AIA) on qualifying expenditures for that taxation year, it can use writing down allowances to account for further items purchased.

Some types of assets are not eligible for AIA including cars, items received as gifts, or items which were owned prior to their use in business. For these assets, a business may claim tax deductions by using the writing down allowance. The percentage of the value that may be claimed is based on the type of item, and the rate deductible for business cars is dependent on the level of CO2 emissions.

Typically, value means the price paid for an item, however, in cases where an item was a gift or was previously owned, the market value should be used in calculating deductions.

Most items that are used for business purposes qualify for an 18 percent annual deduction of their value. The assets that are only eligible for an 8 percent deduction include integral features of buildings such as escalators or air conditioning, items with a long life (25 years or more), thermal insulation of buildings, or cars with higher CO2 emissions. With the exception of cars, HMRC advises that the business claim these assets under AIA rather than claiming only an 8 percent deduction rate, unless the AIA limit has already been reached.

Once a business has calculated the amount of capital allowances that may be claimed during a taxation period, they should include this information on their tax return, which is submitted to HMRC.