Researching into and understanding capital allowances and how the work can be extremely beneficial for businesses. Knowing a lot about the various types of capital allowances will help you to understand that there are unique rules and regulations for each type of capital allowance claim and these can define whether you’re eligible to make a capital allowances claim. A capital allowance can be defined as a tax deduction that is available for particular expenses that serve the business over an extended period of time.

What Capital Assets Qualify For Capital Allowances?

A capital asset that has a prolonged usage period (usually over a year) and is owned and used by the business can be eligible for capital allowance claims. Leased or rented assets will not qualify for capital allowances but will be categorised under revenue expenditure for tax relief.

The most common capital assets are plant and machinery assets. In some instances building work, if it is the demolition of a capital asset, can be deemed to be a capital expenditure and are therefore eligible for a capital allowances claim. 

Certain parts of a building if used for business purposes can qualify as fixtures or integral features of the building and can therefore be claimed as capital allowances.

What Capital Assets Do Not Qualify For Capital Allowances?

Some assets can be subject to specific legislation or regulations that restrict them from qualifying for capital allowances. For example, buildings that are used for residential purposes or assets with private use elements are usually not eligible to receive capital allowances.

Classification Of Capital Assets For Capital Allowances

Capital assets are grouped in the following ways if your asset falls into one of these groups then you will be eligible to make a capital allowance claim for the purchase of the asset:

* Integral features are essential parts of a building and can’t easily be removed from the building’s features. This would likely include assets like heating and water supplies, air conditioning, lifts and escalators and electrical systems.

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Annual Investment Allowance (AIA)

The Annual Investment Allowance (AIA) is one of the business tax reductions that offers businesses the chance to claim 100% tax relief on any capital expenses or assets that qualify for capital allowances, specifically those related to plant and machinery. 

The current claim limit on Annual Investment Allowance is £1M (From April 2023) your claim should be made within the tax year the capital expenditure was made. To make a claim you must complete a self-assessment tax return or adjust your corporation tax return if you are applicable to do so. 

Following these steps can see businesses benefit from the Annual Investment Allowance and save money on their taxes. This type of capital allowance was created by the government to try to encourage businesses to invest more money into all qualifying capital assets to better their business.

Writing-Down Allowance

If your capital allowances claim is more than the Annual Investment Allowance allows (Over £1M) or is an old expenditure then your business may still be able to claim writing-down allowances which offer qualifying enterprises the opportunity to deduct a proportion of the asset costs from their annual business profits. The percentage of the deduction varies based on the type of asset you are making a claim against and which ‘pool’ the asset falls into:

Small Pools Allowance

If all writing down allowances have been exhausted and the balance is under £1000 the business can claim the entire amount through the small pools allowance.

First-Year Allowance (FYA)

For some capital expenditure businesses can claim 100% of asset costs in the financial year they were purchased under First-Year Allowance.

Full expensing has replaced super deductions from 1st April 2023 to 1st April 2026. It is only available for those capital assets that fall into the main pool (plant and machinery assets.)

First-year allowances work in a similar way to annual investment allowances but have no upper limit or maximum claim.

With a 50% first-year allowance businesses can claim 50% of the costs of new integral features (special rate pool assets) in the year that they were first purchased. This has been available since 1st April 2021. The remaining 50% is claimed as writing down allowances.

The Super Deduction

The super deduction was introduced in the 2021 spring budget and allowed enterprises to claim 130% of the costs of the new plant and machinery assets against all taxable profits. The super deduction was now ended in 2023 and has been replaced by full expensing. However, old capital expenditure can still be claimed against on the basis that any qualifying assets were purchased from 1st April 2021 to 31 March 2023. 

Super deductions will continue to be a significant type of capital allowance until March 2025 due to the ability of businesses to amend and resubmit their tax returns where the super deduction is applicable.

Disposing Of Capital Assets In The Face Of Capital Allowances

When buying capital assets the assets will usually depreciate or appreciate in value over time. There often comes a time when businesses need to dispose of their assets to due damage over time, obsoletion or to gain profits. 

Selling a capital asset should be straightforward but it can carry implications for accounting and tax purposes and businesses must be mindful of this. 

If an asset is sold from the main pool or from the special rate pool then the value of the pool will also depreciate by the value of the asset that has been sold. However, if the business is selling an asset that falls into the single asset pool then this may create a balancing allowance or balancing charge which should not make a big difference to the way that a business files its tax return.

How Can CapEx Tax Help?

Businesses who are planning to apply for certain types of capital allowance should take great care in being proactive. Consulting a tax specialist or capital allowances expert will help a business to ensure that their adjustment is made appropriately, timely and in line with any changes to the legislation to avoid any unnecessary scrutiny. Specialists such as CapEx Tax can assist businesses in maximising their tax relief, get in touch with us today to discuss your claim and see how we may be able to help.