Capital Allowance is basically a form of tax relief available to anyone incurring capital expenditure, buying, building or making adjustments to commercial property. Capital allowance let taxpayers write off the cost of certain capital assets against taxable income.
They can be best thought of as a reduction in the purchase price of the assets. In the plainest English possible, technically they are a way to reduce your tax bill to compensate against their wear and tear for usage.
Most experts agree that over 90 percent of commercial properties in the UK have unused claims within them. Taken together, the potential savings through tax relief can be huge and are likely to be available to a huge number of businesses
When added up, the savings in tax relief on plant and machinery claims often come in at over 30 percent of the purchase or construction price of the property in which they are found.
What makes capital allowances especially attractive is that it is possible to claim for unused capital allowances from previous years in any later year’s tax returns, as long as the assets are still owned in that later tax year
IDENTIFYING CAPITAL ALLOWANCES
Not every type of capital expenditure qualifies for capital allowances. The following table shows the capital expenditures that are eligible for capital allowances.
While the following expenditure does not qualify for capital allowances:
- Commercial buildings (apart from expenditure on buildings qualifying for Enterprise Zone Allowances, Research & Development Allowancesor Business Premises Renovation Allowances)
- Residential buildings including doors, gates, shutters, mains water and gas systems
- Land and Structures e.g. bridges, roads, docks
- Some intangibles, such as Trade Marks and goodwill
- Things you have leased – you must own them
- items used only for business entertainment e.g. a yacht or karaoke machine
WHAT COUNTS AS PLANT AND MACHINERY
Plant and machinery include:
- 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’
- Some fixtures e.g. fitted kitchens or bathroom suites
- alterations to a building to install other plant and machinery – this doesn’t include repairs
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
You can claim for fixtures, e.g.
- fitted kitchens
- bathroom suites
- fire alarm and CCTV systems
TYPES OF CAPITAL ALLOWANCE
There are five types of capital allowance:
- INITIAL ALLOWANCE (IA)
- ANNUAL INVESTMENT ALLOWANCE (AIA)
- FIRST-YEAR ALLOWANCE (FYA);
- WRITING DOWN ALLOWANCE (WDA);
- BALANCING ALLOWANCE.
Charges under the capital allowance system are called balancing charges. Capital allowances are broadly intended to give:
- A taxpayer relief for the reduction in the value of an asset while he or she owns it (such as PMA), or
- Relief on a particular cost but which may be shared amongst more than one taxpayer
HOW TO CLAIM
When you’ve worked out your capital allowances, claim on your returns:
- Self-Assessment tax return if you’re a sole trader
- partnership tax return if you’re a partner
- Company Tax Return if you’re a limited company – you must include a separate capital allowances calculation
- The amount you can claim is deducted from your profits.
WHEN YOU CAN CLAIM
You must claim in the accounting period you bought the item if you want to claim the full value under:
- Annual investment allowance
- First-year allowances
If you don’t want to claim the full value you can claim part of it using writing down allowances. You can do this at any time as long as you still own the item.
WHY CAPITAL ALLOWANCES OFTEN GO UNCLAIMED
The problem, historically, has been that identifying capital allowances within commercial properties is a very specialist area, so much so that even many accountants only scratch the surface.
Few people realize for example that a proportion of the money spent on maintenance, refurbishments, alterations, extensions and new installations can also be claimed back against your company’s profits to reduce your tax bill.
The rewards for managing your capital allowances are usually more than worth it, particularly so for SMEs/small businesses.
We at BNW Accountants are fixed fee accountants London & Tax Consultants have dedicated teams that specialize in capital allowances, demonstrating the very real demand from national and international clients in identification, recording and claiming to individuals, small and medium-sized business. We are based in Mitcham and Redhill and have clients across Europe, UK and in particular London
The above information has been summarized for our clients understanding and can only be used at a starting point, should you require detailed understanding or any further help please contact us through telephone, email or our contact form.