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Capital Allowance

Capital Allowance

What is capital allowance?

A capital allowance is an expense that a U.K. or Irish company can deduct from its taxable income. Capital allowances can be claimed for most assets purchased for business purposes, from equipment and research costs to building renovation costs.

The classification of these assets determines whether the full or partial amount can be claimed and whether the provision is deductible within one or more years. Once a business has estimated the number of capital allowance expenses that may be required during a tax period, it must include this information on its tax return, which in the U.K. is sent to H.M. Revenue & Customs (HMRC).


Summary

  • Eligible categories include research and development, equipment, and at least some commercial vehicles.

  • Expenses for non-durable goods, such as office supplies, are not eligible. In addition, rented objects, grounds, facilities, and entertainment are not permitted.

  • Some expenses may be tax-deductible in the year they are incurred, while other eligible amounts are spread over several years.

  • The U.K. and Ireland both allow the deduction of certain business expenses as a return of capital.


Eligible Capital Allowance

Regulated by the HMRC, the Capital Allowances Act allows U.K. businesses to claim deductions for a wide range of expenses. 

The Structures and Equipment category includes goods such as equipment and machinery, vans, and trucks. Some or all of the value of the items may be deducted from the company's pre-tax profits. Other capital allowances include research and development (R&D) costs, patents, and the restructuring of commercial structures. However, the following cannot be claimed as an asset exemption: leased property; buildings, including doors, gates, shutters, water and gas systems; terrains and structures, including bridges, roads and gorges; and any item used for commercial entertainment purposes, such as a boat or entertainment system.


Types of capital allowance

The annual investment allowance (AIA) and the first-year deduction are the capital deductions commonly used for businesses.


Annual Investment Allowance (AIA)

The AIA allows companies to deduct the full value of most items used exclusively for commercial purposes, up to an annual limit of £1million (provisionally increased until December 31, 2020). The tax deduction is required in the fiscal year in which the property is purchased. Most facilities and equipment can be claimed from AIA, with the exception of cars, corporate gifts, and any items purchased prior to use in the business.


First-Year Allowance

A related type of capital buffer is the reserve for the first year. Also called "enhanced capital allowance," it is available in addition to the standard AIA value for certain assets acquired by a company. The deduction can only be made in the year of purchase, hence the name. The categories of items eligible for the first year allowance are energy or water-efficient equipment, including certain types of new low-CO2 machinery, energy and water-efficient equipment, and new vehicles—zero-emission freight.


Using the Writing Down Allowance

If you don't claim all AIA or the first-year allowance that you are eligible for, you can claim part of the cost the following year using canceled missions. A writing-down allowance is spread over several years. It can also be used for assets that are not eligible for other deductions, including cars, items received as gifts, or items you owned before they were used in the business.

The percentage of the amount that can be claimed is based on the type of item, and the commercial car franchise tax depends on the level of CO2 emissions. Usually, the value indicates the price paid for an item. However, in cases where an item was a gift or was previously held, market value should be used to calculate deductions.


Writing Down Allowance Rates

Most items used for commercial purposes have an annual deduction of 18% of their value. Activities that can only benefit from an 8% reduction include complete building components such as escalators or air conditioning, long-lived components (25 years or more), thermal insulation of buildings or cars emitting more CO2. With the exception of cars, HMRC warns that the company is claiming these assets under AIA, rather than claiming them as writing down allowance, with a deduction rate of only 8%, unless the AIA threshold has not already been reached.


Capital allowances in Ireland

The Republic of Ireland capital allowances are structured in the same way as the U.K. capital allowances; however, unlike the AIA in the UK, Irish allowance which can be applied for in full in the year in which they are awarded are limited to those which have specific environmental or health benefits.

You can claim a capital allowance of 12.5% per year for eight years for expenses for installations and equipment; motor vehicles; transmission capacity rights; software; and intangible assets designated as patents, copyrights, trademarks, and know-how. Expenditure on industrial buildings can be declared at 4% over a 25-year period for most industrial buildings.

A business can require 100% Accelerated Capital Allowance (ACA) for the following:

  • Energy-efficient equipment, including alternative fuels and electric vehicles

  • Gasoline vehicles and refueling equipment

  • The nursery or gym equipment offered by the company to employees

ACA may be required during the first year of use of the asset in the business.


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