Capital Allowances: Tax relief on capital expenditure

With the Annual Investment Allowance set to reduce from £1m to £200k from January 2021, now is a good time to make sure your business is maximising its Tax relief on capital expenditure

Let’s get back to basics; your business acquires an asset, it is not recognised in your profit and loss account (thereby reducing your profits), but recognised within the balance sheet. Assets in the balance sheet are generally depreciated; this charge does hit your profit and loss account. In the main, depreciation is not allowed for tax purposes, resulting in increased taxable profits. Capital allowances are one of the tax adjustments which can reduce taxable profits.

An entire Act of Parliament is dedicated to capital allowances and their operation. As a general statement, capital allowances are available for assets which perform some sort of function in your business. There are specific industry based capital allowances not mentioned below and others are available to companies only.

Here we take a look at the key allowances:

• Main Pool – includes the majority of assets which do not fall within a separate class. If the Annual Investment Allowance does not cover the entire year’s spend, the balance of value is written down at 18% p.a.
• Special Rate Asset Pool – attracts a lower writing down allowance of 6%, generally the Annual Investment Allowance should be allocated here before the Main Pool. This pool includes:
• Integral Features (light, electrical, cold water, heating and ventilation systems)
• High (CO2) emitting cars
• Long Life Assets (>£100k asset with useful economic life >25 years)
• Thermal Insulation
• Solar Panels
• Short Life Assets - helps to speed up the availability of capital allowances where the Annual Investment Allowance has been utilised and the asset is likely to be sold/scrapped for no or little value within eight years.
• Structures and Buildings Allowance – a relatively new small allowance in respect of commercial building expenditure.
• R&D Allowances – available for companies’ incurring capital expenditure in respect of qualifying Research & Development activities. The write off has the same impact as the Annual Investment Allowance.
• First Year Allowances – has the effect of writing off the entire cost of an asset like the Annual Investment Allowance. This includes:
• Low emitting cars
• Zero-emission goods vehicles
• Electric vehicle charging points

The timing of when the business incurs the expenditure (and therefore the Tax relief on capital expenditure) is critical to a claim; make sure you do not miss out on this valuable tax relief.