Capital Allowances & Keeping Up With Changes

Capital Allowances & Keeping Up With Changes

What are capital allowances?

Capital allowances allow taxpayers to get certain reliefs on capital expenditures by allowing deductions from their annual taxable income. Not all expenditures can qualify for capital allowances as only those used for specified assets can benefit.

As a result, capital allowances can therefore be likened to tax-deductible expenses that people can benefit from for the expense of certain assets, which allows the taxpayer to write off the cost of the asset with time.

Although the policy was introduced in the UK in 1946, it has experienced specific changes over the years. In the beginning, claimants must have invested in any plant and machinery, structures and buildings, business premises renovation, flat conversion, mineral extraction, research and development, know-how, patents, and dredging. 

Claiming the capital allowances comes with certain benefits, including reducing tax liability, cash refund, and improvement of cash flows into your business. So, if you invested in a property or spent capital on machinery used for trading, you can claim capital allowances. The purchase of new or secondhand properties also qualifies for the allowance and the refurbishment or extension of buildings used for rent or other purposes like hospitals, hotels, banks, and offices.

However, changes have led to the phasing out of some of them. 

Changes to the capital allowances

The Finance Bill, which was passed in 2018, contains most of the significant changes to capital allowances, and most of them took effect in January 2019.  

The changes to capital allowances on plant and machinery reduced the allowance from 25% to 20% and 18%.

Changes in capital allowances rates also now reflect heavily on the cars' carbon dioxide emissions. If a vehicle has an emission of less than 110g/km, it qualifies for 100% allowance; and if it has an emission of between 111g/km and 160g/km, it qualifies for general pool allowance. Anything beyond that goes for a special rate allowance.

Zero-emission cars qualify for a 100% first-year allowance as long as it doesn't produce any emissions when driven and don't apply to assets for leasing. 

  • The government used the previous capital allowances regime to promote spending. The recent changes favor a reduction in the corporate tax rate. This ultimately leaves out entities that are not incorporated.

  • The industrial building allowance has been finally phased out. It used to be at 4%

  • Agricultural building allowance, also at 4%, has been phased out

  • The allowance now favors environmental sustainability. 100% allowance is available for plants and machinery that is deemed to be environmentally sustainable. Cars with low emissions and machinery that runs on alternative energy qualify

  • The allowance at 100% is available for the renovation of any building that would be used for commercial purposes if the said building has been unused for up to a year. If a residential space above a commercial property is converted to rental apartments, it qualifies for a 100% allowance.

  • Assets with longevity of over two and a half decades will enjoy a 10% capital allowance beginning. 

  • Integral features allowance has been lowered by 2% from the initial 10%. Water and space heating and cooling systems, lifts, escalators, moving walkways,  electric and lighting systems, and external solar shading all form integral features. This excludes fixed structures to enclose the interiors, such as walls.

Annual investment allowance (AIA) 

The annual investment allowance, which was also introduced with the 2008 Finance Act, is one of the significant changes to the capital allowances. The AIA allows small businesses to claim 2100% relief on expenditure on capital. This, however, is limited to certain limits in monetary terms.



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