Capital allowances

Capital allowances enable businesses to claim tax relief on certain capital expenditures. Different rules apply to various types of capital expenditure, and the amount you can claim depends on the specific capital allowance you use. If an item is eligible for more than one type of capital allowance, you can choose which to apply.

The main capital allowances currently available are:

• Annual Investment Allowance (AIA) – The AIA is available to all businesses (companies, sole-traders and partnerships) regardless of size. The AIA allows businesses to write off 100% of the cost of qualifying Plant & Machinery (P&M), up to the allowed maximum, against taxable profits. You can claim up to £1 million on qualifying purchases.
• Full expensing and 50% First Year Allowances – The full expensing measure currently applies from 1 April 2023 until 31 March 2026 and allows companies to claim 100% capital allowances on qualifying plant and machinery investments. Under full expensing, for every pound a company invests, their taxes will be cut by up to 25p. For “special rate” expenditure, which does not qualify for full expensing, a 50% FYA can be claimed instead. 
• Writing down allowances – For P&M expenditure that exceeds the AIA or does not qualify for a FYA. You can claim these allowances if your plant and machinery does not qualify for AIA, or you have already claimed the maximum amount. This relief is based on the cost of the items in the year they are acquired. A standard 18% writing down allowance is available on qualifying assets. There is a lower rate of 6% available for certain long-life assets and integral features.

The Annual Investment Allowance (AIA) is a generous tax relief that allows for the total amount of qualifying expenditure on plant and machinery to be deducted from your profits before tax.

The AIA can be claimed by an individual, partnership or company carrying on a trade, profession or vocation, a UK non-residential property business or a furnished holiday let. Only partnerships or trusts with a mixture of individuals and companies in the business structure are unable to qualify for AIA. The AIA is currently available for qualifying expenditure of up to £1 million per year.

If you are thinking of incurring expenditure on large items of capital expenditure for your business before the end of the tax year, there is still time to invest in new equipment and reduce your tax bills for 2023-24. This could mean looking at accelerating plans, where possible, to incur expenditure before the end of the year and maximise relief.

The AIA is available for most assets purchased by a business, for example, machines and tools, vans, lorries, diggers, office equipment, building fixtures and computers. The AIA does not apply to cars.

A claim for AIA must be made in the period the item was bought. This date is defined as the date when a contract was signed – if payment is due within 4 months of the contract being signed – or the actual payment date if it’s due more than 4 months later.

The term 'capital allowances' is used to describe the allowances available to businesses to secure tax relief for certain capital expenditure. The rules that govern the purchase of capital equipment such as computer equipment, vehicles and machinery by businesses are different to those for day to day business expenses that can be deducted from business income when calculating your taxable profits.

However, the fact that capital allowances have been given on the asset as a whole does not prevent a revenue deduction being made for a repair to that asset.

There are special rules for assets that are ‘integral features’. 

Integral features are:

• electrical systems, including lighting systems
• hot and cold water systems (but not toilet and kitchen facilities)
• space and water heating systems
• air-conditioning and air cooling systems
• lifts, escalators and moving walkways
• external solar shading

In general, where the expenditure on an integral feature represents 50% or more of the cost of replacing the integral feature, then the whole of the expenditure is to be treated as capital expenditure on the replacement of an integral feature for capital allowances purposes. 

If you are thinking about purchasing a company car through a limited company, there are many issues that need to be considered. In this short article we will point out some of the main issues, but it is important to research this area and weigh up all the available options. The tax treatment of the purchase will depend on how the purchase of the company car is financed.

The purchase of a company car will be classed as a fixed asset and tax relief will be obtained by way of capital allowances. Cars do not qualify for the annual investment allowance.

The amount of capital allowances that can be claimed will fall within one of the following 3 categories:

• 100% First Year Allowance. New and unused electric or zero emission cars emission cars benefit from 100% capital allowances. This means that 100% of the cost of the car can be deducted in the first year.
• 18% of the car’s value (main rate allowances). This effectively means that 18% of the purchase price can be deducted from your profits each year before you pay tax.
• 6% of the car’s value (special rate allowances). This effectively means that 6% of the purchase price can be deducted from your profits each year before you pay tax.

The difference between the main rate and special rate allowances depends on when the car was bought and its CO2 emissions. The government continues to encourage employers to choose more fuel-efficient vehicles by offering a tax incentive.

The new 100% first-year capital allowance for qualifying plant and machinery assets known as full expensing came into effect on 1 April 2023. This measure expected to help boost business investment and growth.

The Financial Secretary to the Treasury, said:

“We are determined to make the UK the best place in the world to do business, which is why businesses can start to benefit from the raft of tax cuts on offer to boost their growth. With full expensing, the more a company invests the less tax they’ll pay, and I encourage companies of any size to take full advantage of this world-leading reform.”

To qualify for full expensing, expenditure must be incurred on the provision of “main rate” plant or machinery. It should be noted that full expensing is only available to companies subject to Corporation Tax. 

Plant and machinery that may qualify for full expensing includes (but is not limited to):

• machines such as computers, printers, lathes and planers;
• office equipment such as desks and chairs;
• vehicles such as vans, lorries and tractors (but not cars);
• warehousing equipment such as forklift trucks, pallet trucks, shelving and stackers;
• tools such as ladders and drills;
• construction equipment such as excavators, compactors, and bulldozers; and
• some fixtures such as kitchen and bathroom fittings and fire alarm systems in non-residential property.

The new measure will initially apply from 1 April 2023 until 31 March 2026 although this may be extended. The super-deduction that was introduced during the pandemic ended on 31 March 2023. Under full expensing, for every pound a company invests, their taxes will be cut by up to 25p.

For “special rate” expenditure, which doesn’t qualify for full expensing, a 50% first-year allowance (FYA) can be claimed instead. The 50% FYA was introduced alongside the super-deduction and was also due to end on 31 March 2023. It will now be extended by three years to 31 March 2026.

Businesses can also continue to use the Annual Investment Allowance (AIA) to claim a 100% tax deduction on qualifying expenditure on plant and machinery of up to £1m per year. This includes unincorporated businesses and most partnerships.

Designed in part to help offset the increased Corporation Tax main rate, the Chancellor announced the introduction of a new ground-breaking 100% first-year capital allowance for qualifying plant and machinery assets. This measure is also expected to help boost business investment and growth.

The new measure, known as full expensing, will initially apply from 1 April 2023 until 31 March 2026 although the Chancellor suggested that it may be made permanent in due course. The measure builds on the success of the super-deduction which ends on 31 March 2023. Under full expensing, for every pound a company invests, their taxes will be cut by up to 25p.

To qualify for full expensing, expenditure must be incurred on the provision of “main rate” plant or machinery. It should be noted that full expensing is available to companies subject to Corporation Tax only. 

Plant and machinery that may qualify for full expensing includes (but is not limited to):

• machines such as computers, printers, lathes and planers
• office equipment such as desks and chairs
• vehicles such as vans, lorries and tractors (but not cars)
• warehousing equipment such as forklift trucks, pallet trucks, shelving and stackers
• tools such as ladders and drills
• construction equipment such as excavators, compactors, and bulldozers
• some fixtures such as kitchen and bathroom fittings and fire alarm systems in non-residential property.

For “special rate” expenditure, that doesn’t qualify for full expensing, a 50% first-year allowance (FYA) can be claimed instead. The 50% FYA was introduced alongside the super-deduction and was due to end on 31 March 2023. It will now be extended by three years to 31 March 2026.

Businesses can also continue to use the Annual Investment Allowance (AIA) to claim a 100% tax deduction on qualifying expenditure on plant and machinery of up to £1m per year. This includes unincorporated businesses and most partnerships.

Time is running out to claim the super-deduction offering 130% first-year tax relief. The deduction is available to companies until March 2023. The super-deduction was designed to help incorporated businesses finance expansion after the coronavirus pandemic and to help drive growth.

The super-deduction tax break was introduced on 1 April 2021 and allows businesses to deduct 130% of the cost of any qualifying investment on most new plant and equipment investments that would ordinarily qualify for 18% main rate writing down allowances. This means that for every £1 businesses invest, they can reduce their tax bill by up to 25p. The temporary tax relief applies on qualifying capital asset investments until 31 March 2023. 

In addition, an enhanced first year allowance of 50% on qualifying special rate assets also applies for expenditure within the same period. This includes most new plant and machinery investments that would ordinarily qualify for 6% special rate writing down allowances. 

The super-deduction can only be claimed by companies. This means that self-employed traders are unable to benefit. However, they could benefit from the Annual Investment Allowance (AIA) for investments of up to £1 million. The AIA allows for a 100% tax deduction on qualifying expenditure on plant and machinery. The temporary limit of £1 million is now being made permanent.

Businesses can claim a 100% first-year allowance (FYA) on the purchase of certain qualifying Plant and Machinery (P&M). The cash-flow benefit of accelerated tax relief is designed to encourage businesses to invest in capital items which help reduce their carbon footprint by being energy and water efficient. The list of qualifying items includes expenditure on new unused electric vehicles and other cars with zero CO2 emissions.

The list also includes:

• plant and machinery for gas refuelling stations, for example storage tanks, pumps;
• gas, biogas and hydrogen refuelling equipment;
• zero-emission goods vehicles;
• equipment for electric vehicle charging points;
• plant and machinery for use in a freeport tax site, only for companies.

The use of the FYA allows businesses to set the full cost of qualifying P&M against their tax bills in the year of purchase. The FYA is only available on the purchase of new cars with zero emissions. Second-hand cars do not qualify for FYAs (but can be eligible for writing down allowances). If claiming the full amount of FYA would create a loss, it is also possible to claim less than the full 100% FYA and claim the balance using writing down allowances.

A Writing Down Allowance (WDA) is available for plant and machinery expenditure that exceeds the Annual investment allowance (AIA) and / or does not qualify for a First-Year Allowance as well as for residual balances of expenditure that has been carried forward from the previous accounting period. The WDA is based on the cost of the items in the year they are acquired.

There are two rates of WDA for plant and machinery. To calculate them, you first group your expenditure into separate capital allowance pools:

• the main pool – this includes expenditure on most items – the rate is 18%
• the special rate pool includes special rate expenditure including long-life assets, integral features, certain thermal insulation and some cars – the rate is 6%.

Integral features are:

• lifts, escalators and moving walkways
• space and water heating systems
• air-conditioning and air cooling systems
• hot and cold water systems (but not toilet and kitchen facilities)
• electrical systems, including lighting systems
• external solar shading

It is important to note that the capital allowances regime for integral features only applies to the above list and that buildings themselves don’t qualify for capital allowances. However, before you make a claim (or not) for integral features please speak to us as the rules can be complicated and there are many grey areas.

If you are thinking about purchasing a company car through a limited company, there are many issues that need to be considered. In this short article we will point out some of the main issues to be aware of, but it is important to properly research this area and weigh up all the available options.

The tax treatment of the purchase will depend on how the purchase of the company car is financed.

The purchase of a company car will be classed as a fixed asset and tax relief will be obtained by way of capital allowances. The amount of capital allowances that can be claimed will fall within one of the following 3 categories:

• 100% First Year Allowance. New and unused electric or zero emission cars emission cars benefit from 100% capital allowances. This means that 100% of the cost of the car can be deducted in the first year.
• 18% of the car’s value (main rate allowances). This effectively means that 18% of the purchase price can be deducted from your profits each year before you pay tax.
• 6% of the car’s value (special rate allowances). This effectively means that 6% of the purchase price can be deducted from your profits each year before you pay tax.

It is clearly demonstrated from the percentages above that the government is encouraging employers to choose more fuel-efficient vehicles by offering a tax incentive.

The company will also be liable to pay Class 1A NICs in respect of the provision of a company car based on the car benefit charges. Employers currently pay Class 1A NICs at the rate of 13.8%. This is increasing to 15.05% from 2022-23. There will be additional Class 1A NICs due where the company pays for private use of fuel. 

The employee benefitting from the use of a company car will also face additional tax costs from the use of their company car. This depends on the rate of tax they pay, the value of the car and its C02 emissions.