Capital allowance

Capital allowances are the 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.

A capital allowance is given instead of depreciation for certain types of asset. Depreciation is not allowed as a deduction for tax purposes, and must be added back to net profit for tax purposes. If capital expenditure does not qualify for a capital allowance, it means that the business gets no tax relief for such expenditure.

Capital allowances may be claimed for:

Historically, there have also been capital allowances for industrial and agricultural buildings. These have now been phased out, though an allowance may now be claimed for features integral to a building

Of these, by far the most important category is plant and machinery.

Neither term is defined in legislation, though guidance is given by HMRC

This defined machinery as anything that has a moving part. It does not have to be mechanically powered, so a hand operated device qualifies.

The term "plant" is defined in the court case Yarrow v France which was not a tax case. This held that plant "includes whatever apparatus is used by a businessman for carrying on his business - not his stock in trade, which he buys or makes for sale; but all goods and chattels, fixede or dead, which he keeps for permanent employment in his business". In that case, it was held that his employer's horse was plant.

The scope of exactly what comes within the scope has been the subject of many cases. Among the more important cases, the following have been held to be plant:

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.

The main types of capital allowance are:

AIA is claimed for plant and machinery, with some exceptions such as for cars. It is fixed amount regardless of the size of the business and so is worth proportionately more for smaller businesses. The amount has varied many times since its introduction. In the 2015 summer Budget it was announced that it would be fixed at £200,000 until 2020.

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