Capital allowances

Capital allowances give you tax relief for the reduction in value of assets by letting you write off their cost against the taxable income of your business.

Guide

4 min read

1. Overview

If you buy an asset - eg a car, tools, machinery or other equipment - for use in your business, you may be able to claim a capital allowance.

Capital allowances are also available for certain building-related capital spending, for qualifying capital spent on research and development, and for donations of used business assets to charity.

Capital allowances are available to sole traders, self-employed persons or partnerships, as well as companies and organisations liable for Corporation Tax.

2. What you can claim capital allowances for

You can claim capital allowances for what your business spends on certain assets that it owns and uses in the business, provided certain conditions are met. You cannot claim capital allowances for the cost of things that your business buys and sells as part of its trade.

Equipment that you own and use in your business - tools, machinery, office equipment, computers, vehicles, pieces of plant and factory equipment may qualify for plant and machinery allowances.

Spending on research and development (R&D) (including equipment used for research and development) - you may qualify for allowances if your R&D relates to your business' trade.

Gifts of equipment to charity - if you donate used assets that have qualified for plant or machinery allowances to a qualifying charity or community amateur sports club, you may be able to claim plant and machinery allowances on any left over written down value.

Certain fixtures and integral features in buildings - expenditure on sanitary ware, fitted kitchens and certain other fixtures in a building may qualify for plant and machinery allowances. Expenditure on certain integral features of a building - eg electrical wiring, cold water systems, heating and air conditioning systems, and lifts might also qualify.

Renovating business premises - capital expenditure on the renovation of business premises in designated 'disadvantaged areas' may qualify for the Business Premises Renovation Allowance.

Other expenditure - the following allowances are also available:

  • mineral extraction allowance
  • know how allowance
  • patent allowance
  • dredging allowance
  • assured tenancy allowance
  • contributions allowances

3. Research and development allowances

The Research & Development (R&D) allowance gives relief for capital expenditure on R&D. You can claim a capital allowance of 100 per cent on expenditure that meets the necessary conditions. This allowance should not be confused with the R&D Corporation Tax relief available for revenue expenditure.

Eligible R&D expenditure includes capital expenditure you incur for:

  • carrying out the R&D
  • providing facilities or assets used by your employees for carrying out R&D

However, it does not include expenditure you incur to acquire rights in R&D or rights arising out of R&D, or any revenue expenditure on the R&D.

There is often an amount of overlap between R&D capital expenditure and plant and machinery costs. Where the expenditure is on plant and machinery used for research and development you can choose which, if any, allowance you prefer to claim.

Corporation Tax relief on general R&D costs

General R&D costs that aren't capital expenditure may qualify for specific R&D reliefs, but only if you pay Corporation Tax.

4. First year allowances for energy and water saving initiatives

First year capital allowances give you tax relief for the value of assets by letting you write off their cost against the taxable income of your business.

Plant and machinery 'first-year allowances' enable you to make a claim for up to 100 per cent of the cost of certain qualifying items against your business profits in the year of purchase.

First-year allowances of 100 per cent are currently available for expenditure on:

  • certain energy-saving and water efficient equipment - but only if the item appears on a specific list of qualifying equipment (these are known as 'enhanced capital allowances')
  • new cars with very low carbon dioxide emissions
  • certain vehicle gas refuelling equipment

For capital expenditure, businesses can also claim a temporary first-year allowance of 40 per cent on any assets that would otherwise go into their main 'writing-down allowance' pool.

All of the above allowances are available if you pay Income Tax as self-employed, a partnership or sole trader, or if you pay Corporation Tax as a company or organisation.

HMRC has further information on first year capital allowances.

5. Claiming capital allowances

How you claim capital allowances and the time limits for doing so depends on whether you're self-employed or a partner and pay Income Tax, or a company or organisation that pays Corporation Tax.

Self-employed

If you are self-employed, you must claim any capital allowances in your self-assessment Income Tax return. The claim must normally be made within 12 months after the 31 January filing deadline for the return.

Partnerships

If your business is a partnership, you need to claim your capital allowances on assets owned by the partnership collectively in the partnership return, not in the returns for individual partners.

You should make claims on the Partnership Tax return. These should be made within 12 months after the 31 January filing deadline for the return.

Companies or organisations liable to Corporation Tax

If your company or organisation is liable to Corporation Tax you must make any claims for capital allowances in your Company Tax Return. You must include a separate capital allowances calculation with your return.

Your calculation will need to show:

  • which allowance you're claiming
  • how you calculated your claim
  • how much you're claiming

You must claim capital allowances within 12 months of the filing date for the Company Tax Return for the accounting period you want to make the claim for.

HMRC has guidance on capital allowances for Corporation Tax.

First-year tax credits

There are also some special rules regarding tax credits for spending on certain energy-saving or environmentally beneficial plant or machinery.

See HMRC's guidance on first-year tax credits.

Time limits if you omit to make a claim

If you discover that you have missed a claim after submitting your Company Tax, Income Tax or Partnership Return, you can request an amendment. However, there are certain time limits on this.

Read our guide on Support for innovation, research and development.

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