What are Capital Allowances?
Capital Allowances replace the disallowed DEPRECIATION in the adjustment of profits for TAX PURPOSES, giving tax relief against TRADING PROFITS in respect of expenditure incurred on the cost of QUALIFYING PLANT & MACHINERY. A newly introduced STRUCTURES & BUILDINGS ALLOWANCE (SBA) is also available on the cost of QUALIFYING COMMERCIAL BUILDINGS.
PLANT is generally defined as assets that perform an active function in the business and will include office furniture and equipment. Machinery will include MOTOR VEHICLES and COMPUTERS, and building alterations necessary for the installation of plant & machinery.
PLANT & MACHINERY capital allowances are not available on the cost of a BUILDING (except STRUCTURES & BUILDINGS ALLOWANCE) but are available on INTEGRAL FEATURES OF A BUILDING USED IN THE TRADE, including LIFTS & ESCALATORS, ELECTRICAL SYSTEMS, HEATING and AIR COOLING SYSTEMS.
CAPITAL ALLOWANCES are prepared for the ACCOUNTING PERIOD of the business NOT the TAX YEAR and will be deducted from the ADJUSTED TRADING PROFIT of that ACCOUNTING PERIOD.
If the business is VAT registered and the INPUT VAT is recoverable on the purchase of an asset then the VAT EXCLUSIVE net cost will be used for CAPITAL ALLOWANCES. If the VAT is NOT recoverable, as for example on the purchase of a car or if the business is NOT VAT registered, the the VAT INCLUSIVE amount will be allowed CAPITAL ALLOWANCES.
Annual Investment Allowance (AIA)
The AIA gives an allowance of 100% for the first £1,000,000 of qualifying expenditure incurred in a 12 month accounting period.
AIA is available on the purchase of ALL PLANT & MACHINERY EXCEPT MOTOR CARS.
Any expenditure in excess of the AIA limit will qualify instead for a WRITING DOWN ALLOWANCE (WDA). Most MOTOR CARS qualify for WDA of 18%. But MOTOR CARS with CO2 EMISSIONS OVER 110 G/KM only qualify for SPECIAL RATE POOL ALLOWANCE of 6%. NEW CARS with CO2 EMISSIONS of less than 50 G/KM qualify for 100% FIRST YEAR ALLOWANCE.
Structures & Building Allowance (SBA)
Structures & Building Allowance is available on the cost of qualifying COMMERCIAL BUILDINGS and is available to UNINCORPORATED TRADERS & COMPANIES.
Qualifying buildings will include FACTORIES, WAREHOUSES and OFFICES as well as WHOLESALE and RETAIL properties. They also include the cost of WALLS, TUNNELS & BRIDGES.
LAND & any part of the building used as a DWELLING does NOT qualify for SBA. So, when an unused building is bought from a developer, the price paid – excluding the value of the LAND – will be eligible for the SBA from the time that property is brought into qualifying use, ie USED WITHIN THE TRADE or LETTING.
The annual WRITING DOWN ALLOWANCE for STRUCTURES & BUILDINGS is 3%.
Expenditure which qualifies as PLANT & MACHINERY cannot also have SBA.