Capital allowance is a form of tax relief that companies may claim. Capital allowance is on most assets bought for use in the business. It ranges from equipment and research costs to spending on building improvements, etc.
The term Capital allowances were first used in 1946 to encourage investment and sustain British industry after the world war. Capital allowances were raised to actual commercial depreciation rates as a result of the 1984 corporate tax revisions.
However, this guide will show you what capital allowance is and how a business may be a limited firm, a sole trader, or a partnership to get benefits for it.
What is Capital Allowance?
Capital allowance (CA) is an expenditure that businesses may claim against their taxable profits. The United Kingdom or Irish companies may avail of this opportunity. Capital investment works as a fixed asset in the company’s accounts on the balance sheet.
A company’s annual tax income decreases by claiming a capital allowance. It also leads to low tax deductions. A considerable amount of the expense may be eligible for capital allowances. Assets for tax relief include air conditioning and water systems, data cabling, lighting, and various other assets.
Businesses can claim in full or part of CA. It depends on whether the allowance is deductible in a single year such as a first year allowance or over several years. A capital allowance claim depends on the asset classification. Companies claim a number of capital allowance expenditures claimed during a taxation period. This statement is used on its tax return, which is filed with HM Revenue & Customs in the United Kingdom (HMRC).
What Qualifies For Capital Allowances?
Most of the capital allowances are liable for plant and machinery purchases. The asset must be owned by the company/individual seeking capital allowances as a general rule. Capital allowances are also claimed for these:
- Research and development
- Cars, vans, and trucks are used for business.
- Crematoria and cemeteries.
- Mineral extraction
- Renovation of business premises
Businesses can’t claim capital allowances for land and structures. Certain fixed plants and machinery within a building may be, and other items include:
- Buildings
- Buildings doors, gates, water, shutters, and gas systems.
- Land and constructions
- Bridges, roads, and docks
- Assets are used for business entertainment such as boats, entertainment systems, etc.
Enterprise zones are also eligible for special capital allowances.
How does capital allowance work?
Capital allowances are similar to tax deductions. They provide for qualified capital expenditures which are incurred on the provision of certain assets utilised in business trade or rental operations. They essentially allow a taxpayer to depreciate the cost of assets in the form of tax relief. However, there are two major types of CA available for businesses:
- Annual Investment Allowance
- First Year Allowance
Some businesses do not claim the entire amount of an annual investment allowance. Others don’t claim the first year allowance. In that case, you can claim a portion of the expense in the next accounting period utilising Writing Down Allowance.
Annual Investment Allowance
The Annual Investment Allowance (AIA) is a type of capital allowance in the form of tax relief. British corporations can obtain this tax relief based on purchased equipment. It deducts a specific amount of eligible capital expenditure from their taxable profits in a particular tax year. This fund relieves business purchased assets, such as tools, machines, and other business equipment.
First Year Allowance
First-year allowances are capital allowance classifications. They allow firms in the United Kingdom to invest in new industrial tools or equipment and reduce the taxable payment between 6% to 100%. Its origins can be traced back to the post-World War II period when the British government sought ways to restore the economy. First-year allowances for various capital investments. It includes equipment such as computer and internet technology, energy-saving devices, etc.
Writing Down Allowance
You can generally deduct the entire cost from your profits before paying taxes. You can get an annual investment allowance (AIA) when you buy business assets. Therefore, writing down the allowance allows you to claim the full amount of purchased items. You can also include AIA items worth more than the AIA amount or the first year allowance.
Some items do not qualify for an annual investment allowance. They have already claimed AIA on items worth more than the AIA amount. These items include cars, gifts, or things you owned before you used them in your business. They can be easily claimed in writing down allowance.
What is the Capital Allowance example?
Capital allowances are not available for the acquisition of fixtures, equipment, and machinery. They are available for the purchase of structural works. However, from 1 January 2019 through 31 December 2021, there is an Annual Investment Allowance of up to £1,000,000, after which it reverts to £200,000.
Currently, the AIA temporarily raised the limit from £200,000 to £1,000,000 to authorise capital gains allowance expenditure. You can use this limit on plant and machinery from 1 January 2022 to 31 March 2023.
Suppose a company spends £100,000 on a machine with a 10-year expected life. The company could depreciate the asset at a rate of £10,000 per year until it reaches netbook zero value after ten years.
On the other hand, you purchased equipment for your company costing £1,010,000, so that’s £10,000, exceeding the £1,000,000 AIA. Thus, you can gain the benefit of the Main Rate Pool, which is 18% of its first year.
Capital Allowances On Cars
Businesses can claim capital allowances on cars that they buy and use. Capital allowance allows you to deduct a portion of the value from your gains before you pay tax. You can use writing down allowance for cars. Cars do not qualify for the annual investment allowance or the first year allowance.
However, business owners or car owners can claim first-year allowances in addition to the AIA. They don’t count towards your annual investment allowance limit, and the rate depends on their CO2 emissions.
- You can claim the full value of the car as First Year Allowances
- You can claim 18% of the car’s value in Main Rate Allowances that fall into the pool group of Writing Down Allowance
- You can claim 6% of the car’s value Special Rate Allowances that also fall into the category of Writing Down Allowance
The main and special rates initiate for limited companies on April 1st and solo traders and partners on April 6th. From April 1st, all firms are subject to the first-year allowances rate.
| Car Description | What rate and category you can claim |
| New and unused electric vehicle, CO2 emissions are 0g/km | First Year Allowances |
| New and unused electric vehicle, CO2 emissions are 50g/km | Main Rate Allowances |
| In a second-hand electric vehicle, CO2 emissions are 50g/km | Main Rate Allowances |
| New or second-hand vehicle, CO2 emissions are over 50g/km | Special Rate Allowances |
Sole Traders and Partners
You cannot claim capital allowances repeatedly for simplified mileage expenses. Sole traders or investors use business or company vehicles on a regular basis. They can get a capital allowance on car expenses using a flat rate for mileage. They don’t have to calculate the actual cost of buying and running your vehicle. There are some government-declared simplified expenses that you can use for:
- You are using cars for business use such as hackney carriages, black carbs, etc.
- Goods Vehicles such as vans
- Motorcycles
What rate you can get per mile with simplified expenses, here’s a list of expenses:
| Vehicle Rate | Per Mile |
| Goods vehicles and cars on their first 10,000 Miles | 45p |
| Goods vehicles and cars after 10,000 Miles | 25p |
| Motorcycles | 24p |
For instance,
Calculate the simplified mileage expenses. You can claim a capital allowance if have driven the cars or good vehicle for 12000 miles over the last year.
10,000 miles x 45p = £4,500
2,000 miles x 25p = £500
Total you can claim = £5,000
What are Capital Allowances in Ireland?
The capital allowances in the Irish republic are structured similarly to those in the United Kingdom. In Ireland, you can claim allowances for business expenses in full during the year. These expenses are specific for environmental or health benefits.
Irish residents may claim a capital allowance of 12.5 per cent per year for eight years on plants and machinery. For example, motor vehicles, computer software, transmission capacity rights, etc.
For the most part, you can return expenditures on industrial buildings at a rate of 4% per year for 25 years. Your company can also claim 100% of Accelerated Capital Allowance. The alternative fuel automobiles and energy-efficient equipment are liable for this allowance. Its examples include electric cars, gas vehicles, and refuelling equipment. Your company provides the creche and gym for employees. Your equipment must be new, energy-efficient, and meet specific energy-efficient standards. It should meet one of the ten classes in Schedule 4A of the TCA, 1997.
However, there is no such provision for claiming the capital allowance. You cannot get an allowance for expenditures such as refuelling equipment or gas vehicles. You can also apply some standard self-assessment requirements. Visit the official site of Irish tax and customs for more information.
