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A Capital allowance refers to sums of money a UK business can deduct from the overall corporate or income tax on its profits. These sums derive from certain purchases or investments, outlined in the Capital Allowances Act 2001.
Capital allowances may be claimed for:
- The cost of vans and cars, machines, scaffolding, ladders, tools, equipment, furniture, computers and similar items you use in your business
- Expenditure on plant and machinery
- Items a business operator used privately before using them commercially
- Certain types of buildings - including improving a property, and converting space above commercial premises to flats for renting
- Research and development facilities and equipment (Research and Development Capital Allowances)
Plant and machinery is claimed on the second fix (all the work after plastering to the finished building).
Where a capital allowances claim has been made on a property a new purchaser can only make another claim valuing the plant and machinery at the same rate as claimed previously. Further claims can be made on a property where it is extended or re-developed but only on those new elements of plant and machinery introduced to the building.
The amount of the allowance depends on what is claimed for. In some cases, the rates are different in the year a business entity made the purchase from those in subsequent years.
A business operator cannot claim capital allowances for things bought or sold: these are claimed as business expenses. If a business asset is bought on a hire purchase basis, the original cost of the item can be claimed as a capital allowance, but the interest and other charges count as business expenses.
Writing down allowance, in United Kingdom taxation, is the annual rate at which capital allowances can be claimed. This rate is reduced or extended if the chargeable period is shorter or longer than one year.
The writing down allowance is the rate which applies in the absence of initial or first year allowances. The rate applies on a straight line basis for industrial buildings, hotels, agricultural and forestry buildings and works. A reducing balance basis is used for all other assets.
Total writing down allowances may not exceed the balance of expenditure after deducting initial or first year allowances.
The writing down allowance (WDA) is 10% for the main pool (this excludes cars, and capital covered by either first year allowance of annual investment allowance, AIA).
Although the WDA can be extended (time apportioned) to reflect the financial period in which a company is trading, this does not occur for the First year allowance, which is fixed regardless of the length of the financial period.
Capital allowance reliefs can be set against the client’s taxable profits reducing the amount payable. Companies pay Corporation Tax at 20% or 26% (2011-12 figure), whilst individuals pay tax at 20%, 40% or 45%. Please note as it is an allowance against taxable profit, you have to be a tax payer to benefit, therefore this does not normally apply to property owned in SIPPS or by charities and trusts. Allowances are generated when a business client builds or acquires commercial property. The amount of plant contained within the building or acquired property is the key to maximising the relief.
The claim should be considered as an effective discount and cash contribution to the construction cost or purchase price. The claim provides a tax saving that accrues over time. It is possible to claim allowances on investment properties but plant let in a "dwelling house" is excluded. Blocks of flats, halls of residence etc. will therefore qualify.
For property that is being acquired, the specialist can apportion the purchase price under a recognised HMRC formula, and this is where the inherent property skill can maximise the claim with optimal costing of the plant contained within the property
- HMRC website http://www.hmrc.gov.uk/rates/corp.htm