Maximising capital allowances relief

There are multiple ways you can help clients benefit from these important reliefs

IP image

Capital allowances reduce the taxable profits of a business and enable it to retain more of its profits. With depreciation not allowable for tax purposes, a thorough understanding of capital allowances is critical in managing the tax liability for any business with capital expenditure.

However, for many businesses expenditure on plant and machinery will determine only part of their overall capital-allowance claims. Depending on the nature of the business, claims may be made under different rules in respect of any of the following:

  • plant and machinery
  • mineral extraction
  • research and development
  • know-how
  • patents
  • structures and buildings.

Technically, all the allowances (excluding super-deduction – see below) are available for both income tax and corporation tax purposes. However, corporation tax relief for expenditure incurred by companies on know-how and on patents will in practice be given instead under the regime applying to expenditure on intangible assets.

Also, if your total capital expenditure is less than a specified annual investment allowance (AIA) (see below), you can (in general) claim the full amount as a capital allowance in the first year.

For capital expenditure over the annual investment allowance, capital allowances are claimed as writing-down allowances, allowing you to claim 18% for the cost of most plant and machinery each year or 6% on special rate pool of plant and machinery.

Integral features

Capital allowances are available on integral features at the rate of 6%. Integral features include (but are by no means limited to):

  • electrical and lighting systems
  • cold water systems
  • space or water heating systems, powered systems of ventilation, air cooling or air purification (including floors or ceilings that comprise such a system)
  • lift, escalators and moving walkways
  • external solar shading.

Permanent features such as floors, walls and ceilings are excluded.

Super-deduction

From 1 April 2021 until 31 March 2023, companies investing in qualifying new plant and machinery assets will benefit from a 130% first-year capital allowance. This upfront super-deduction will allow companies to cut their tax bill by up to 25p for every £1 they invest. Investing companies will also benefit from a 50% first-year allowance for qualifying special rate (including long life) assets.

HMRC has confirmed that plant or machinery that has undergone some limited use for the purposes of testing, delivery or demonstration, can be eligible to claim super-deduction.

You can find more about super-deduction relief within this article.

Annual investment allowance (AIA)

Annual Investment Allowance (AIA) is effectively a 100% first-year allowance for business expenditure on qualifying plant or machinery.

The general rule is that qualifying expenditure is:

  • expenditure on the provision of plant or machinery wholly or partly for the purposes of a qualifying activity that the person incurring the expenditure carries on
  • as a result of incurring the expenditure the person incurring the expenditure owns the plant or machinery.

AIA is not available:

  • on assets not used immediately in the trade
  • business cars
  • in the chargeable period in which the qualifying activity is permanently discontinued
  • on a transaction with a connected person.

The AIA amount has temporarily increased to £1m between 1 January 2019 and 31 March 2023. Read more detailed HMRC guidance.

First-year allowances

You can claim ‘enhanced capital allowances’ (a type of first year allowances) for the following equipment, which must be new and unused:

  • electric cars and cars with zero CO2 emissions
  • 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, if you’re a company.

You cannot normally claim on items your business buys to lease to other people or for use within a home you let out.

Motorcycles, lorries, vans and trucks are not considered cars hence can be included in the annual investment allowance.

You can claim first year allowances in addition to annual investment allowance; they do not count towards your AIA limit. HMRC CA23110 provides more details.

Structures and buildings allowance

Structures and buildings allowance (SBA) can be claimed for expenditure incurred in purchasing, building or leasing non-residential structures and buildings on or after 29 October 2018. The SBA allows a deduction from profits at an annual rate of 3% in 2020/21 (previously 2%) calculated on the expenditure.

Since 29 October 2018, businesses may be able to claim the structures and buildings allowance tax relief each year on qualifying expenditure incurred. The structure must:

  • not have been used as a residence the first time it was used or during the period you’re claiming for
  • be used for a qualifying activity
  • have an allowance statement.

Find out more in CA90300.

Looking to the future….

In its Spring Statement 2022, the government announced its intention to reform the capital allowances rules to encourage capital investment, possibly by implementing on or more of the following measures:

  • increasing the rate of writing-down allowances for main rate expenditure from 18% to 20%, and for special rate expenditure from 6% to 8%
  • increasing annual investment allowance to £500,000 permanently
  • introducing a new first year allowance of 40% for main rate expenditure, and of 13% for special rate expenditure
  • introducing an additional first year allowance of 20% so that allowances equal to 120% of the amount of the expenditure are given over the period of ownership/use of the asset
  • introducing to full expensing so that 100% relief is given for the expenditure in the period in which it is incurred.

ACCA has arranged a free webinar in partnership with Ignition and Fathom on 4 October 2022, which will be delivered by Paul Soper. The webinar will look at considerations relating to the super-deduction and provide an update on the latest changes to capital allowances. 

As these reforms are crucial for SMPs in the current economic environment, all  members are encouraged to respond to HMRC’s consultation by 1 July. Members wishing to send in comments for ACCA’s response to the consultation should send these to ukpolicy@accaglobal.com.

Useful resources

ACCA guide to spring statement 2022 for current rates

ACCA guide to corporation tax reliefs and allowances