Capital allowances for businesses with buildings and machinery

What are capital allowances?

Capital allowances are a tax-efficient way of spreading the cost of certain business assets over several years. The aim of capital allowances is to allow you to claim a proportion of the cost from your taxable profits, thereby reducing your tax bill. They are, in effect, compensation for commercial depreciation which is not tax deductable.

Capital allowances are not usually available on commercial buildings themselves, but can be claimed for on their fixed contents. The UK Government offers businesses the following advice, “you can claim capital allowances when you buy assets that you keep to use in your business.” In this case assets include equipment, machinery and business vehicles, and are known collectively as plant and machinery. The list may include items such as heating systems, sanitary fittings, lifts or air conditioning systems but can also encompass computers, office equipment and furniture, printing presses, lathes or tooling machines, shop fittings, computer-aided machinery, robotic machines and even amusement park rides.

Annual Investment Allowance (AIA)

An important form of capital allowance for commercial business owners is Annual Investment Allowance (AIA). This provides tax relief at 100% on qualifying assets up to a set amount – £200,000 at the moment – for items which you have purchased during your first year of trading.

AIA has some restrictions, which means that you cannot claim for items which you have previously purchased and then move to your commercial premises. Neither can you claim for items which are leased, or which are used for business entertainment. Doors, shutters, gates, mains water and gas supplies, bridges, roads and docks are also exempt.

What is the Writing Down Allowance (WDA)?

The Writing Down Allowance (WDA) enables you to claim tax relief on a part of the value of our assets, if your outlay is greater than AIA. WDA may also be used to claim for items which do not fall under AIA. Items which are claimed under WDA must be pooled into one of three separate pools, each with different rates of tax relief, depending on whether they are ‘whole life’ assets (such as electrical or heating systems etc) or ‘short-life assets’ such as cars.

Eligibility for Enhanced Capital Allowances (ECA)

If you’re renovating your commercial property and are installing environmentally-beneficial assets, such as those which will save energy or water, you will be able to claim ECA in the first year of their installation. Low C02 emission and electric cars have a separate ECA scheme, and electric vans qualify for 100% capital allowance.

What is available for Research & Development Tax Relief?

If your business focuses on research & development within science and technology a creative and innovative manner, you will be able to claim up to 150% tax relief. The importance of understanding capital allowances cannot be overstated.

If, for example, you wish to sell your business or purchase a commercial premises, and no previous capital allowance has been claimed, it will affect both the sale price and the amount of capital allowance you can claim in the future. It is essential, therefore, that you consult with a qualified and professional accountant who has experience in the area of capital allowances for businesses. The Eddisons team can offer you guidance and advice on all aspects of capital allowances in order that you can make an informed choice about minimising your tax liabilities.