Very simply this is the main method your business will obtain tax relief for items in the balance sheet!
When your accounts are prepared, you will notice a section in the balance sheet titled fixed assets. There may be a number of categories contained within this section such as freehold property, plant and machinery, motor vehicles, fixtures and fittings. Some assets classified as intangible can also qualify for capital allowances.
The value of these assets may be depreciated over a specific timeframe, which you will note is charged within your profit and loss account. Depreciation is generally not permitted when calculating taxable profits, there are exceptions however, for instance finance lease depreciation. Instead of permitting depreciation, the Government use the capital allowance regime to try and persuade business owners to invest in capital.
Company owners celebrated when Rishi Sunak (then Chancellor) announced the introduction of the super-deduction, a 130% capital allowance for qualifying assets acquired between 1 April 2021 until the end of March 2023. This meant that if you spent £10,000 on a new piece of equipment, you could reduce your taxable profits by £13,000.
At the time the Treasury note stated that, “Since the Covid-19 pandemic, existing low levels of business investment have fallen, with a reduction of 11.6% between Q3 2019 and Q3 2020. Much of the UK’s productivity gap with competitors is attributable to our historically low levels of business investment compared to our peers. Weak business investment has played a significant role in the slowdown of productivity growth since 2008. Making capital allowances more generous works to stimulate business investment.”
It is not always obvious that capital allowances are available. Looking behind the internal walls of a commercial building, fixtures such as electrics, heating systems, a ventilation system will all qualify for a form of capital allowance. When buying or selling a commercial property interest, the subject of capital allowances will undoubtedly come into play, indeed there is an entire section of the pre-contract enquiry document known as CPSE1 which your solicitor will review.
Since 2012/2014 changes it is important that the s198/199 fixtures election & pooling requirements are discussed early on; making sure that both parties file the election with their relevant return and within two years of the transaction. The price for free-moving assets within the property can be negotiated separately.
It is worth noting that in some instances repairs/replacement parts of integral features may have been reflected within the profit & loss account, but capitalised within the tax computations and allowances claimed. It is incredibly important to document in detail the history of capital allowance claims for a property, as well as your business more generally.
If buying from non-taxpayers e.g. pension trustees, council, charity; direct from a developer or from a business who have owned the property prior to April 2008; the size of capital allowance claims can become quite valuable. The result, creating upfront tax relief on an asset which generally does not until sold.
Whilst residential properties usually do not qualify for relief through the capital allowance regime, there are exceptions including Furnished Holiday Lets and assets which serve common parts of a building which contains two or more dwellings e.g. a house divided into two flats.
There are a number of regimes within the capital allowance tax code each with their own set of conditions; key points to consider:
- The timing of expenditure in order to be able to claim tax relief.
- Certain connected companies and group members may have to share allowances.
- A connection with the vendor may impact the availability of certain allowances for the purchaser.
- Which allowance to claim and whether you want to claim the available allowances in full.
The special rate asset pool includes:
- Thermal insulation
- Integral features
- Long life assets
- High emitting cars
- Solar panels
The general pool includes the majority of remaining qualifying assets.
The £1m Annual Investment Allowance can be offset against special rate asset and general pool items, with some exceptions such as cars, connected party transactions, mixed partnerships and trusts. The effect being that the taxable profits are written off in full in the year of acquisition. Particularly helpful for those managing the Basis Period Reform and resulting acceleration of taxable profits.
Short life asset pools are commonly used for assets expected to be written off or sold for low consideration within an eight year period.
First Year Allowances (FYA) include new and unused:
- Electric/zero CO2 emitting cars registered on or after 17th April 2002 (ends 31/03/2025).
- Zero emitting goods vehicles (ends 31/03/2025)
- Plant or machinery used for natural gas, biogas or hydrogen at a refuelling station. This need not be open to the public, an operator of a fleet of commercial vehicles may install a gas refuelling station on its own premises (ends 31/03/2025).
- Plant or machinery for electric vehicle charging points (ends 31/03/2025).
- Plant or machinery for use primarily in an area which, at the time the expenditure is incurred, is a special tax site/freeports (ends 30/09/2026).
Full expensing relief was introduced following the end of the super-deduction, this providing 100% relief on an unlimited value of new and unused qualifying expenditure. An additional 50% FYA for special rate expenditure was introduced over the same timeframe (1 April 2023 and 31 March 2026).
The Structures and Buildings Allowance was introduced for building construction on or after 29 October 2018; generally buildings do not attract relief within the capital allowance regime.
Research and Development Allowances are available for assets used in qualifying research and development activities.
There are also more sector specific allowances such as Mineral Extraction Allowance which provides tax relief for capital spend and restoration costs within the extractive industries. Dredging Allowance for those businesses involved in the maintenance or improvement of the navigation of a harbour, estuary or waterway and IP based allowances, commonly used by unincorporated businesses.
The tax relief associated with capital allowances can generate significant cash-flow benefits particularly when undertaking a major capital project; please get in touch if you require advice.