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A Comprehensive Guide to the Different Types of Capital Allowances

If you’re running a business in the United Kingdom or Ireland, you need to know about capital allowances.

These allowances are a type of tax write-off for business assets and machinery, and it’s important you know which allowances you can and cannot claim. Read more to learn more about the different types of capital allowances

What Are Capital Allowances?

Businesses in the United Kingdom or Ireland may claim a capital allowance which is an expenditure against a taxable profit. A capital allowance can be claimed on most business assets from research costs and equipment to building renovation expenses. 

It’s the classification of these assets that decide if a full or partial value can be claimed and if this allowance is deductible for only one year or several. A business first must figure out the right amount of capital allowance expenditures that can be claimed for a taxation period. Then the business should include this information on its tax return. 

What Can Be Claimed As Capital Allowances?

Common assets that qualify for capital allowances include vans, computers, tools, cars and special machinery. Typically the cost of property and buildings don’t qualify.  To find out what types of property does and doesn’t qualify, click here to find out more.

Unless this property is classified as an “integral feature” which can be easily moved like an escalator, lift, or air conditioning system, then you might be able to claim it. 

Allowable Capital Allowances

These allowances are regulated by the HM Revenue and Customs (HMRC). The Capital Allowances Act allows UK businesses to claim deductions for a wide range of expenditures.

There’s also the Plant and Machinery category that includes assets like cars, equipment, trucks, and vans. Some or all of the value of these items might get deducted from the business’ profits before paying taxes. 

Other capital allowances cover research and development (R&D) expenses, renovations, and patents. However, you cannot claim shutters, gates, doors, water and gas systems. You also can’t include land and structures like roads, bridges, docks, and any item of business for entertainment like a boat or entertainment system. 

How Much Can You Claim?

Figuring out how much capital allowances you can claim can get challenging since the amounts can change based on the type of asset. Also depending on the type of capital allowance, rates can change each year. 

might get complex since the amounts vary depending on the type of asset that is involved. The rates can also change each year depending on what type of Capital Allowance is used. 

However, there are three different key types of capital allowances. 

Types of Capital Allowance

There are two common types of capital allowances that are available to businesses, and these are the annual investment allowance (AIA) and the first year allowance. 

The Annual Investment Allowance (AIA)

A business is able to claim a hundred percent of the cost of machinery and plant in the year it was bought with the Annual Investment Allowance (AIA).  The AIA applies to machinery, equipment, and work vehicles, but it can not be claimed on cars.

The maximum amount you can claim in an AIA varies from year to year but was set one million pounds from January 1st, 2019 to December 31st, 2020. Be aware of the maximum amount you can claim for the period that you are claiming for. 

You can find a full list of amounts at dates on the HMRC website. Also, know you can only claim AIA during the period you bought the asset, and if you sell the item after claiming the AI then you might need to pay tax. 

If you decide to not use your AIA in the year that you purchase the asset, then you can’t claim a hundred percent next year. Instead, you’ll use the standard Writing Down Allowance rate.

It is still worth it to claim AIA each time, even with the business has a loss, otherwise, you will lose it. Even if you are making a loss, then the loss can still be carried forward and used against future profits, so you will still get to use your AIA. 

Any assets brought into the business that was previously owned is not applicable for AIA. 

First-Year Allowance

First-year allowances are also known as “enhanced capital allowance,” and are available above and over the standard AIA amount for certain business assets purchased. The deduction can only be made during the year of purchase as the name implies. 

The categories of items that are eligible for the first year allowance are water or energy-efficient equipment. This includes certain types of new cars that have low CO2 emissions.

Using the Writing Down Allowance

If you don’t claim all of your AIA or first-year allowances that you are entitled to, you can claim part of the amount in the next accounting period with writing down allowances.

A writing down allowance is spread out over a number of years and can also be used for assets that aren’t eligible for other deductions. Items like gifts, cars, or items that were owned before they were used for business. 

Rates for the Writing Down Allowance

Most items that are used for business can qualify for eighteen percent annual deduction of their value. Assets that are only eligible for eight percent include integral building features like escalators, air conditioning, items with a lifespan of 25 years or more, cars with higher CO2 emissions, and thermal insulation of buildings.

HMRC advises that businesses claim these assets (except for cars) under AIA instead of claiming them as writing down allowance. It’s also advised that these assets have an eight percent deduction rate unless the AIA limit is already reached. 

Claim Your Company’s Capital Allowances

Now that you know what capital allowances are and the different types of allowances out there, make sure your claim the right amount of allowances next tax year. If you are unsure about an allowance, consult with your accountant or HMRC website.

For more accounting advice and resources, be sure to check out our website today!