In simple terms, capital allowance is the amount of money that a UK business can claim against its pre-tax income. This allowance is thanks to the Capital Allowances Act 2001, which is vast and complex resulting in the accounting profession often relying on experts.
Businesses can claim capital allowances on many of the assets purchased for business-related purposes. Depending on the nature of the asset, the business can claim either the full value or a portion of it.
Capital allowance is not compatible with depreciation. Depreciation is not allowed as a tax deductible. Businesses have to add the cost of depreciation to the net profit for all tax purposes. When capital expenditure does not qualify for a capital allowance, or it is not claimed, businesses have to pay the full cost.
More specifically, businesses can claim a capital allowance for:
- Capital spent on buying commercial property
- Cost of property improvement and renovation
- Property Embedded Fixtures & Features (PEFFs)
- Real estate conversions (from residential to commercial)
- Machinery and equipment purchases
- Research and development
All the above are capital expenditures. Your business will also have revenue expenses from buying and selling products and services. Trading expenses never qualify for a capital allowance. In general terms, any expenditure that will have a permanent benefit for your business may qualify as a capital expenditure.
By claiming capital allowances, you are writing off some of your expenditures as essential business expenses. This leads to lower taxable income.
Which Expenditures Qualify For Capital Allowances
As we have seen above, not all expenditure qualifies for capital allowances. In fact, accountants are often unaware of what types of expenditures qualify, which leads businesses to pay higher taxes.
The first qualifying criterion is ownership. You have to own the asset in order to claim the capital allowance. Leased assets do not qualify for capital allowances. However, you may place a claim for rental cost expenditures.
The cost of building or purchasing property do not qualify for capital allowances. However, some aspects of the building might qualify as property embedded fixtures and features (PEFFs). While you cannot reduce taxes from building the property itself, there are ways to reduce overall taxes by claiming allowances on essential features and fixtures.
Property Capital Allowance
In addition to property embedded fixtures and features, property capital allowance claims play a big role when selling and buying commercial property. Depending on the nature of the property, you might qualify for a significant claim.
There are also special capital allowances for eco-friendly and energy efficient machinery and industrial plants. If you are purchasing new equipment, their energy efficiency will directly impact the size of the claim.
Commonly Missed Capital Allowance Claims
As we mentioned before, due to the complexity of the accounting sector, many are often unaware of what qualifies as integral property embedded fixtures and features. This means you might be paying more taxes than you should on your property.
Integral fixtures and features refer to all immovable items that are essential to the operations of your business. These include:
- Security systems
- Ventilation systems
- Heating systems
- Kitchen installations
- Sanitary systems
Plus generally, anything your business can’t operate without that cannot be moved out of premises. These items qualify for capital allowance whether you bought them with the property, or installed them at a later date.
Unless you initiate the process to identify your capital allowance, most of the above will remain unclaimed. Accountants very often need the support of an expert with surveying capabilities to identify possible capital allowance claims.
How to Make Capital Allowance Claims
Those who are liable to UK tax and makes relevant expenditure or purchases a commercial property may qualify for capital allowances. This includes sole proprietors, partnerships and companies.
If you or your company qualifies for a capital allowance, you may have the ability to claim a refund of tax paid straight away, use it as a tax credit against future tax costs or, a combination of the both. This means that by claiming the capital allowance, you effectively reduce future taxes.
Calculating your capital allowance is rarely straightforward. This is why you will probably need a dependable expert to review your situation and recommend on the most efficient approach.
From the moment you make your capital allowance claim, you have plenty of time to claim your tax return. Typically, you can claim your tax return within twelve months from the filing deadline for returns.
Do You A Need Capital Allowance Claim For Your Commercial Property?
Making a capital allowance claim might shave off thousands of pounds from your annual taxes.
Here at Capital Allowance Review Service, we specialize in property capital allowance recovery for companies with pending claims on their commercial property and offer property tax consultancy to businesses across the nation.
We have helped numerous companies claim tax repayments and tax credits to offset future tax liabilities.
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Our expert team are here to help answer any of your capital allowances questions or enquires you have about your commercial property.