Decoding Capital Allowance Rates
What are Capital Allowances?
At its core, Capital Allowance is a tax relief granted by governments to businesses to deduct the cost of qualifying capital expenditures from their taxable profits.
These expenditures typically encompass tangible assets like machinery and equipment. Plus vehicles, and even buildings that are used for business purposes. Governments implement capital allowance rates to control the amount and type of allowances available. This includes controlling what tax deductions are available immediately and what deductions are spread over multiple years.
The Significance of Capital Allowance Rates
Businesses can effectively manage their tax liability
Capital allowance rates hold substantial importance for businesses. They play a pivotal role in influencing financial decisions, cash flow management, and overall profitability. By applying these rates, businesses can effectively manage their tax liability while strategically planning their capital expenditures. This not only aids in prudent financial management but also encourages companies to invest in essential assets that contribute to productivity and growth.
Types of Capital Allowance Rates
Understanding capital allowance rates involves acquainting with the different categories under which these rates are applied:
Annual Investment Allowance (AIA)
AIA offers businesses the opportunity to claim a 100% capital allowance on qualifying expenditures, up to a predefined limit. The current limit is £1 million and acts as a good incentive for businesses to invest in eligible assets.
Main Pool and Special Rate Pool
For assets that do not qualify for Annual Investment Allowance (AIA), businesses can claim capital allowances through the main pool and special rate pool on a writing-down allowance basis. Main pool assets are typically eligible for an 18% capital allowance rate. While special rate pool assets, such as integral features of buildings, are subject to a 6% rate.
First-Year Allowance (FYA)
FYA provides businesses with the opportunity to claim a 100% capital allowance rate on specific qualifying assets in the year of purchase. This encourages immediate investment in assets that contribute to energy efficiency and environmental conservation.
Special Rate pool first year allowance
Only available for companies, this provides a 50% first year allowance on purchases of special rate pool assets and is particularly useful if the Annual Investment Allowance (AIA) has been fully utilised. Initially legislated to end on 31 March 2023 this allowance is now available for a further 3 years until 31 March 2026.
Only available for Companies and on general/main pool assets only. This allowance ceased on 31 March 2023 and is only available on expenditure up to and including that date. The allowance is available at 130% on qualifying assets, but if your accounting year end is after 31 March 2023 the allowance will only be available proportionally.
Full Expensing (FE)
Available from 1 April 2023 until 31 March 2026 for limited companies only, this allowance gives 100% tax relief on general/main pool qualifying expenditures and includes long-life assets.
Structures and Buildings Allowance
This allowance is available on expenditure for walls, ceilings, floors, walls, etc., and is generally available on assets that don’t qualify for any of the above allowances. It is claimable at 3% per annum on a straight-line basis. The allowance is available for most partnerships, individuals, and companies, and is available on both freehold and leasehold expenditure. It should, however, be noted that if you own the property and sell at a later date, the relief is subject to a potential clawback via the corporation tax and capital allowance mechanisms.
Capital allowance rates over the years
*In the Spring Budget of 2023, a provision for ‘full expensing‘ was introduced. Starting from April 2023, businesses that have eligible expenses on new plant and machinery between 1 April 2023 and 31 March 2026 can claim:
- A 100% First Year Allowance (FYA) for main rate costs (known as ‘full expensing’).
- A 50% FYA for special rate costs, which includes long-duration assets.
**Only companies can benefit from the super-deduction, which offers 130% for main rate assets. 100% for assets partially used for ring-fenced businesses and partly for eligible businesses (based on division). The super-deduction applies to eligible asset purchases made from 1 April 2021 to 31 March 2023. If you purchased the asset on or before 31 March 2023 but your accounting period ends after that date, super-deduction will be available proportionally.
***Only companies can benefit from the 50% first-year allowance available for special rate pool asset additions. This allowance was initially expected to end on 31 March 2023 but has now been extended for a further 3 years to 31 March 2026.
Strategies for Maximising Capital Allowances
Strategic Asset Planning
Careful consideration of the timing of asset purchases can optimise capital allowance claims. Businesses can plan to acquire assets when rates are favourable, thereby reducing tax liabilities.
Pooling assets in the correct category can yield higher allowances. Businesses should assess their asset classification to ensure they benefit from the most favourable rates.
Claiming Unclaimed Allowances
Many businesses overlook unclaimed allowances from previous years. Retroactively reviewing and amending tax returns can unlock additional tax benefits.
Engaging with the CARS team
In the intricate realm of business taxation, capital allowance rates stand as a valuable tool. By grasping the variations of these rates and employing strategic approaches, businesses can minimise their tax burdens and bolster their financial health. To help ensure maximum tax relief has been secured, expert help is strongly advised and can prove crucial when processing these claims. Experts have the knowledge and experience to tackle cases of all varieties and can work alongside your accountant to achieve the best results.
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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.