1. Overview
The purchase of business assets such as vehicles, machinery, equipment and buildings is different from other business expenses because rather than consuming them immediately, you will keep and use them.
There are two main accounting methods and these can impact how expenditure on assets is handled.
Cash basis
This can only be used by sole traders and partners with a turnover of less than £150,000 per year. It is simpler as you simply record income or expenses when you physically receive money or pay a bill, with the benefit you never have to pay Income Tax on money you’ve not yet received (eg due to an unpaid invoice). If using cash basis, with the exception of cars, you can claim the cost of equipment you keep and use in your business as an allowable business expense, rather than as a capital allowance.
Traditional accounting
This is used by sole traders and partners with turnover greater than £150,000 as well as all limited companies. Income and expenses are recorded on the date they are invoiced or billed, rather than when the money physically leaves or arrives in the business. Under this accounting system, you will not treat assets as though they are expenditure. Instead, you may be able to claim capital allowances that enable you to deduct some or all of the value of an asset from your profits, before you pay tax, which reduces your tax bill.
Your accountant is best placed to advise you on the most appropriate method of accounting for your business and the most suitable approach to capital allowances. This guide gives useful background for you to make the most of discussions with your accountant.
2. Capital allowances for plant and machinery
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.
The term "plant and machinery" covers assets like tools, machinery, office equipment, computers, factory equipment, and business vehicles including vans, lorries and cars.
All of these may qualify for plant and machinery allowances. The costs of altering a building to install plant and machinery, or the cost of demolishing plant and machinery may also qualify.
Integral features in a building may qualify too, such as lifts, heating systems, air conditioning and electrical systems and some fixtures such as kitchens and bathrooms.
To be able to claim, you must own (rather than lease) the asset, or have a hire purchase contract or long funding lease.
There are three main types of allowance. If an item qualifies for more than one capital allowance, you can choose which one to use.
- Annual investment allowance (AIA) - you can claim the full value of the items (up to £1 million in each accounting period) on most plant and machinery except cars. If you have profits lower than the value of the assets, you may prefer to claim under writing down allowances instead (or part AIA and part writing down).
- 100% first year allowances - in addition to AIA, you can claim 100% first year allowances (but not on the same expenditure) for specific types of plant and machinery such as electric or zero emission vehicles, equipment for charging electric vehicles, refuelling equipment and storage tanks and plant for use in a freeport tax site.
- Writing down allowances - you can claim these if your plant and machinery does not qualify for AIA or you’ve already claimed the maximum amount. They let you deduct a percentage of the value of certain items from your profits each year - the exact amount you deduct depends on the item and for cars it depends on their CO2 emissions.
For two years until March 2023, the government also temporarily offered the super-deduction (up to 130% of value) or 50% special rate first year allowance between the announcement and the implementation of the Corporation Tax increase from 19% to 25%. This aimed to stimulate investment in plant or machinery post pandemic, and discourage businesses deferring expenditure until allowances will be deductible at the higher Corporation Tax rate.
3. Structures and buildings
Purchase, construction and renovation
You may be able to claim structures and buildings allowance tax relief each year for spend on some or all the costs relating to the purchase, construction or renovation of the structure or building.
Construction costs include design fees, site preparation, construction work, renovation, repair, conversion and fitting out. (Some costs may be more relevant for plant and machinery allowances and obviously you can't claim for the same items twice.)
Allowances for costs relating to the purchase will vary depending on whether you purchased the structure from a developer or someone else.
If after claiming this allowance, you sell or demolish the structure, you may be required to pay more Capital Gains Tax or Corporation Tax.
Business Premises Renovation Allowance - disadvantaged areas
Capital expenditure on the renovation of business premises in designated 'disadvantaged areas' may qualify for the Business Premises Renovation Allowance. Buildings that qualify for this are commercial buildings or structures in a disadvantaged area which must have been unused for at least a year. The initial allowance is 100% of the qualifying spending.
4. Research and development
Research and development (R&D) allowances are distinct from R&D Corporation Tax reliefs, but they are complementary schemes which mean that businesses can claim relief on both capital spend and other expenditure. As they're easily confused, both are summarised here.
Capital allowances
Spending on research and development (R&D), for example building a laboratory or buying equipment used for research and development, may be qualifying expenditure for R&D allowances if your R&D relates to your business' trade.
You can claim a capital allowance of 100 per cent on expenditure that meets the necessary conditions.
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
You may be eligible for Corporation Tax relief for non-capital R&D expenditure related to a new process, product or service, or improving an existing one. From April 2023 there are changes to how the research and development (R&D) tax credits work.
There are two categories of tax relief:
- SME R&D tax relief for organisations with under 500 staff and a turnover of under 100 million euros or a balance sheet total under 86 million euros
- R&D expenditure credit (RDEC) for large companies or SMEs that have been subcontracted to do R&D by a large company
Read more about support for innovation, research and development
5. Other allowances
If you gift assets to charity, you can claim full capital allowances provided the equipment (such as furniture, computers, vehicles or machinery) has been used by your company.
The government provides a list of other situations where allowances can be claimed, such as ‘know-how’ (intellectual property about industrial techniques) and patent rights.
6. 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: claim any capital allowances in your Self Assessment tax return.
- Partnerships: claim your capital allowances on assets owned by the partnership collectively in the partnership tax return, not in the returns for individual partners.
- Limited companies: must make any claims for capital allowances in your Company Tax Return and include a separate capital allowances calculation with your return. HMRC has guidance on capital allowances for Corporation Tax.
If you discover that you have missed a claim after submitting your return, you can request an amendment. However, there are certain time limits on this.
As capital allowances are a complex area, many businesses seek advice from their accountants when making claims.
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