What can you claim as a capital allowance?

With only a couple of months before the super-deduction, one of the most generous capital allowances for plant and machinery ends, now is the time to know what you can claim as a capital allowance so you can claim.

We’ll explain how capital allowances work and what you can and can’t claim.

What are capital allowances?

Capital allowances are tax relief for businesses that allow you to deduct some or all of the value of an item from your profits before you pay tax. 

You can claim capital allowances on ‘plant and machinery’, including:

• items, machinery and equipment you keep to use in your business
• parts of a building that are integral to it, such as lifts and electrical systems 
• some fixtures, such as fitted kitchens, bathroom suites and CCTV systems (known as ‘integral features’)
• commercial vehicles
• costs of demolishing plant and machinery.

Capital allowances are also available to those who have incurred qualifying capital expenditure on the construction, fitting, refurbishments or acquisition within a trade. That can include offices, hotels, restaurants, retail, industrial, mixed-use developments and various others. 

You must also own the asset being claimed for. So, if you have hired or leased the asset, capital allowances cannot be claimed, but you may still obtain tax relief on the rental costs as revenue expenditure.  

When you buy a building from a previous business owner, you can only claim for integral features and fixtures that they themselves claimed for. 

If you let out residential property, you can only claim for items to be used in a residential property if either:

• you run a furnished holiday lettings business; or
• the item is to be used in the common parts of a residential building, for example, a table in the hallway of a block of flats.

Types of capital allowances for plant and machinery 

With capital expenditure, you can claim different amounts depending on which specific capital allowance you use. 

The capital allowances include:

• annual investment allowance – allows you to claim up to £1 million on certain plant and machinery; the main capital allowance
• 100% first-year allowances – lets you claim the full amount for new and unused plant and machinery, mostly related to energy, in the year it was purchased
• writing down allowances – you can claim these if your plant and machinery do not qualify for the annual investment allowance or if you’ve already claimed the maximum amount. 

Temporary capital allowances are ending soon

There are two more capital allowances, but they are ending very soon on 1 April 2023. They were both introduced by then-Chancellor Rishi Sunak in the Spring 2021 Budget to boost investment during the Covid-19 pandemic. 

The first is the super-deduction, which allows companies to reduce their taxable profits by 130% of the cost of qualifying brand new plant and machinery before tax.

This is an allowance that is only available to limited companies and only on brand-new items of plant and machinery. The super-deduction is not available on nearly new or used items of equipment.

The second is the 50% special rate first-year allowance, which lets companies deduct 50% of their cost from their profits before tax. 

The Government has a special tool that you can use to check if you can claim one of these two allowances and how much relief you may be entitled to.

Both of these allowances are ending very soon, so it’s important that you don’t make mistakes on your claim.

Get in touch if you’d like assistance with your capital allowance claim.