Claiming capital allowances: An overview
Claiming capital allowances can be a valuable way for businesses to reduce their taxable profits and manage their cash flow.
First-year allowances include annual investment allowance (AIA), 50% first-year allowance (50% FYA), super-deduction*, and full expensing (FE). These allow businesses to claim full or partial relief on their fixed asset investments in the first year.
Writing down allowance (WDA) is another relief that spreads the asset’s cost over several years. To claim capital allowances, businesses must provide evidence of their expenditure and follow the rules and time frames set out by HM Revenue & Customs.
Overall, claiming capital allowances can be a complex process, but it can result in significant savings for businesses, particularly if they make substantial investments in fixed assets.
Please note, Super-deduction has now ended, however, there may still be an opportunity to make a claim.
First year allowances: Maximising relief in the first year
First-year allowances allow businesses to maximise tax relief on their investments in fixed assets.
The annual investment allowance (AIA) allows businesses to claim 100% of costs up to a certain limit in the first year up to £1m. This means that the entire cost of the asset can be deducted from taxable profits. The 50% first-year allowance allows for a 50% deduction of the cost of certain assets in the first year (with the remaining 50% written down in future years). While super-deduction provides a 130% deduction of qualifying plant and machinery investments.
By claiming first-year allowances, businesses can accelerate the rate at which they reduce their tax liability and free up cash flow for other areas of the business. However, it’s important to be aware of the time frames and rules set out by HM Revenue & Customs to ensure that businesses are eligible for these allowances.
Writing down allowances: Spreading relief over several years
Writing down allowance is a type of capital allowance that spreads relief on eligible expenditures over several years
This could be explained as the default or standard approach where First Year Allowances (FYA) are not available. The percentage rate at which the allowance can be claimed depends on the type of asset and the date it was purchased.
The purpose of writing down allowance is to provide businesses with ongoing tax relief on their investments in fixed assets. Even after the first year in some cases. However, businesses should be aware that writing down allowances typically provides tax relief at a much slower rate when compared to first-year allowances. For example, when compared with annual investment allowance or 50% first-year allowance. Therefore, it’s essential for businesses to consider the most appropriate type of relief for their specific circumstances.
Capital allowances and property: Special considerations
When it comes to claiming capital allowances for commercial property, there are special considerations and strict deadlines that businesses must adhere to. For instance, if a commercial property is purchased after April 2014, then a Section 198 Election must be raised in most, but not all, cases. Where a Section 198 Election is required, this must be done within two years of the purchase date.
Businesses must ensure that they meet the relevant deadlines to avoid losing out on valuable tax relief.
Understanding these special considerations and following the appropriate time frames is essential to maximising the benefits of capital allowances for a property. Learn more about the requirements of a Section 198 Election.
Sale or disposal of assets: How timing affects relief
The treatment of Capital Allowances relating to property in the event of disposal is often confused or misunderstood.
There are two key areas of misunderstanding:
- Section 198 Elections
- Chargeable Gains
There is often confusion surrounding Section 198 Election, however, there are also misunderstandings when it comes to Chargeable gains. Specifically, any savings achieved by claiming capital allowances will be cancelled out later by an increased chargeable gain.
This statement is not true and is explained clearly in s41(1) Taxation of Chargeable Gains Act 1992 (TCGA 1992). Stating that it is not necessary to deduct any capital allowances from the cost of an asset for capital gains purposes. Meaning it is not possible for a capital allowance claim to create or increase a chargeable gain.
Making the most of capital allowances
Capital allowances are an essential tool for businesses looking to reduce their tax liability by claiming relief against their property expenditure
It’s important for businesses to understand the different types of capital allowances available. These include first-year allowances, writing down allowances, super-deduction, and full expensing. Plus, the special considerations that apply when claiming allowances for property or when selling or disposing of assets.
By carefully planning and timing their claims, businesses can maximise the benefits of capital allowances and save significant amounts on their tax bill. Seeking the advice of a tax professional can also help businesses ensure they are fully aware of the rules and regulations surrounding capital allowances and can take advantage of all the relief available to them.
5 December 2023
Capital Allowances ManualCapital allowances play a significant role in taxation. Allowing businesses to claim deductions for the depreciation of their assets. Among these assets, plant and machinery are frequently mentioned. However, the term “plant and machinery” is not explicitly defined in tax law. It should also...
22 November 2023
Autumn Budget 2023: Changes to Capital AllowancesThe Autumn Budget of 2023 has arrived, and with it comes significant changes and developments the government has put in place. Chancellor Jeremy Hunt delivered the statement on Wednesday, 22 November 2023. For businesses and individuals alike, these adjustments in tax policies can have far-reaching implications.
Our expert team are here to help answer any of your capital allowances questions or enquires you have about your commercial property.