What is Capital Allowance & how can I use it to claim tax relief for my business?

Capital allowances explained: What is capital allowance & am I eligible?

Capital allowances are a type of business tax relief offered by the government. They allow you to deduct some — and in some cases all — of the value of an item from your profits before you pay tax.

If you have recently acquired capital expenditure to buy, build or refurbish a commercial building, and if you pay income or corporation tax, then you are likely eligible to claim capital allowances. 

You can claim capital allowances mostly on ‘plant and machinery’. The government lumps all of the following together into a somewhat vague-sounding category that includes:

• • Equipment

• • Machinery

• • Vehicles for business purposes. Including vans, lorries and cars

You can also claim capital allowances if you are:

• • Extracting minerals from the earth

• • Renovating business premises in disadvantaged parts of the UK

• • Conducting research and development (which will make you eligible for R&D tax credits)

• • Working on a type of intellectual property including ‘knowhow’ intellectual property

• • Patent rights

• • Dredging allowances

• • Structures and buildings

At RanddUK, our capital allowance specialists will help you claim back as much as possible when it comes to your tax relief. If you’re eligible, we can get your money in as little as 12 weeks. We work with lots of different sectors and niche industries and are certain your business will be covered. You may be eligible for tax relief and not even know it. We will help you claim back everything possible.

What are the different types of capital allowances?

There are a few different types of capital allowances you can claim. And you can claim different amounts on each:

• • Annual investment allowances (AIA) — enables you to claim up to £1million on certain items that qualify as plant and machinery.

• • 100% first-year allowances — enables you to claim the full amount for certain items that qualify as plant and machinery in the year it was purchased.

• • Full expensing and 50% first-year allowance — enables you to claim for certain items that qualify as plant and machinery from 1 April 2023.

• • Super-deduction or special rate first-year allowances — enables you to claim for certain items that qualify as plant and machinery purchased between 1 April 2021 up to 31 March 2023.

• • Writing down allowances — enables you to claim for certain items that qualify as plant and machinery even if you do not qualify for AIA or if you’ve already claimed the maximum amount on your AIA.

Sometimes an item can qualify for more than one type and you can choose which one to use. If you are unsure which one will benefit you most, then our specialists will happily look into this for you.

Example: What is capital allowance in taxation? 

A manufacturing company buys a facility for £4million which had undergone significant upgrades to optimise production capabilities. By claiming allowances on the investment in plant and machinery, the owner benefited from substantial tax relief.

In this instance, meticulous examination of the renovation expenses leads to the identification of £600,000 in unclaimed Capital Allowances, representing 15% of the property’s purchase price. The resultant tax relief amounted to £120,000.

We can also help you claim tax relief on other business costs, such as your everyday running costs; interest payments on any assets purchased, and items you buy and sell as part of your operations. Contact us today. Our experts will make sure you win back everything and anything you’re entitled to in the form of tax relief.

How do you calculate capital allowances?

Our capital allowances specialists will closely study your expenses, equipped with expert knowledge of the government’s rules and rates. Armed with this knowledge, they will categorise the eligible costs accurately.

For example, consider the following scenario: a forward-thinking developer purchases a historic building for £8million and transforms it into a hotel. By capitalising on the availability of Annual Investment Allowances and optimising the claim process, £2.4million (30% of the purchase price) is identified in unclaimed Capital Allowances.

This is achieved via an exhaustive review of the property’s purchase details and the extensive renovation costs, outlining eligible assets and their corresponding values. The hotel developer consequently achieves a tax saving of over £480,000.

Without in-depth knowledge of construction and tax law, your non-specialist accountant may likely fail to uncover other expenses you could claim back on. Such as:

• • Labour/work taken to install the new machinery (general pool)

• • Any ventilation, lighting and electrics, insulation, heating and water supplies (special rate pool)

• • Specific work carried out on the walls, floor, ceilings and foundations of the new and refurbished laboratory (structures and buildings allowances)

With experienced capital allowances specialists, we can uncover all the different types of capital allowance claims you can make. For example, the company here would claim: – 100% first-year allowance on new machinery – 50% first-year allowance on any special rate pool developments – 3% on structures and building allowances for general building works Entitling them to a tax relief running into the millions. If you are thinking of acquiring a property, or a refurbishment, we strongly recommend hiring an expert to review the rates and allowances, to help reduce your business’s tax burden.

How do capital allowances work?  

You have to put in a claim for your capital allowances. The government won’t just give them to you. They must be claimed as a part of your tax return.
There is no time limit for claiming capital allowances and you will be entitled to claim on an asset provided your business still owns and uses it.

What does NOT qualify for capital allowances?  

You cannot claim plant and machinery allowances on the following:

• • Leased items. You need to own them (with exceptions for hire purchase contracts and long-funding leases)

• • Entertainment items or assets, ranging from business yachts to karaoke machines

• • If you have purchased a plot of land on which you plan to build a structure in which R&D activities will be carried out, you cannot yet claim R&D allowance

• • Certain structures and buildings including bridges, roads, docks, doors, gates, mains water and gas systems — and so on

However, it can get complicated as — as we noted above — you may be able to claim for certain structures and buildings allowance and some items that may be considered entertainment.

For example, you can claim on:

• • Demolition costs of plant and machinery

• • Lifts, escalators and moving walkways

• • Water heating systems and air-conditioning systems

• • Cars and other vehicles

As you can tell, it can get very complicated. After all, what is a capital allowance and what is not can be difficult to unpack. Without expert help, there’s a good chance your accountants will miss something. That’s why we always recommend hiring a specialist team — so you can maximise the amount you’re eligible for.

How do capital allowances work or interact with R&D tax relief?

A type of capital allowance includes Research and Development Capital Allowances (otherwise known as Research and Development Allowances or ‘RDAs’).

RDAs are a form of tax relief. If you are investing in capital that is being used to innovate your business and you incur capital expenditure when carrying out qualifying R&D projects, you can qualify for RDAs.

RDAs allow many eligible businesses to seek a total 100% reduction on all their qualifying expenditure in R&D facilities (against their corporate tax obligations). Including:

• • Laboratories

• • Plant and machinery

• • Company vehicles for R&D staff

• • IT infrastructure

• • Renovation of development facilities

While qualifying R&D projects typically include:

• • Overcoming technical challenges

• • Creating and testing prototypes

• • Streamlining processes

• • Trialling new or substituting materials

• • Developing bespoke software

• • Trial and error

• • Industry firsts

Overall, this total reduction that RDAs allow can massively help businesses by expensing all their R&D investments in fixed assets within the first year.

RDAs and R&D Tax Credits work together to maximise tax relief on your R&D investments. While R&D Tax Credits cover operational costs, RDAs cover capital expenses on assets used for R&D. You cannot claim RDAs and R&D tax credits for the same expenditure. However, by utilising both schemes correctly, you can lower your taxable profits by writing off your fixed assets in the year they were purchased – thereby increasing the surrenderable taxable loss for a cash tax credit. If you have further questions, our R&D tax credit specialists are happy to help.

FAQs — What are capital allowances?

What happens when I purchase an asset but cannot get Annual Investment Allowances (AIA)?

You can still claim tax relief. However, instead of the full cost upfront like with the AIA, you’ll get a smaller, gradual tax deduction (writing down allowance) over several years. This is typically 8% or 6% of the asset’s cost per year.

Can capital allowances be deferred/carried forward?

Yes. You can choose to delay claiming tax relief on your capital expenditure, allowing you to save it for a future year when it might be more beneficial to you.

However, you must use your full AIA in the current year. Failure to do so and you will miss out on the opportunity to claim 100% tax relief on your asset purchase.

Can capital allowances create loss?

If your business is already losing money, claiming capital allowances might make your losses even bigger. However, you can use this to reduce your tax bill in previous or future years.

For previous years: If your business made a profit in the previous year, you can use the new loss to reduce the amount of tax you paid on that profit.
For future years: If your business is loss-making now and in the future, you can carry forward the loss and use it to offset future profits.

Can capital allowances be carried back?

No. However, if claiming capital allowances creates a trading loss for the current year, you can carry back that loss to the previous year’s profits (assuming the business was profitable in that previous year).

Additionally, you can amend a previous year’s tax return to claim capital allowances, provided it is within the specified timeframe for amendments.

Are capital allowances the same as depreciation?

No. Both concepts, however, are related to the value of assets over time. Depreciation is for accounting purposes, while capital allowances are for tax purposes.

Depreciation is an accounting method that shows how an asset loses value over time. It’s like spreading the cost of the asset over its lifespan. While depreciation isn’t tax-deductible, capital allowances are.

What is the maximum that can be claimed under R&D capital allowance?

There is no maximum limit to the amount you can claim.

How long does it take for HMRC to process R&D allowance claims?

With randd uk, the process is likely to evolve over around 12 weeks. When your claim has been qualified and we have obtained all of your R&D costs, we can calculate the value of your claim and submit it to HMRC.

Once submitted, you will typically hear back from HMRC within eight to 12 weeks. Find out more on our capital allowance specialists page.

Conclusion

Depending on your business, you might qualify for different types of capital allowances. It’s important to understand these differences — as your expenditure might fall into more than one category — to ensure you claim the maximum amount that your business is eligible for.

Which is why we recommend talking to specialists like ourselves first. Failing to consider R&D capital allowances can result in you missing out on financial tax savings and rewards. So please do get in touch with us if you are thinking about claiming.