With the cost of living going up and businesses feeling the pinch, it is more important than ever for tax relief to be maximised where possible. One area that can sometimes be overlooked is capital allowances which provide tax relief on capital investment. This could be particularly useful for transport and logistics companies who are looking to update their fleet of commercial vehicles after the diesel ban comes into force.
This article will explain the allowances that are available and will give a high level overview of the rules for claiming.
What are capital allowances?
Capital allowances are a form of tax relief that businesses can claim on certain types of capital expenditure. They allow businesses to deduct some, or all, of the value of an asset from their profits before calculating their tax liability. This can significantly reduce the amount of tax a business needs to pay.
Qualifying assets
Capital allowances can be claimed on a variety of assets, including:
- Equipment
- Machinery
- Business vehicles (e.g. vans, trucks, cars)
- Fixtures and fittings (e.g. fitted kitchens, bathroom suites)
- Integral features of buildings (e.g. heating systems, air conditioning, lighting)
Available allowances
This allows businesses to claim tax relief on 100% of the qualifying asset in the year of purchase. The AIA covers Plant and Machinery (which includes equipment, machinery and commercial vehicles such as trucks and vans) and integral features in a building (also to include warehouses). Assets must not be purchased from a connected company in order to qualify.
Businesses (or groups if relevant) have an annual £1,000,000 limit for the AIA. It was confirmed in the recent budget that this limit will remain.
The AIA is available for all trading businesses, including those that are unincorporated and most partnerships.
Full expensing
Full expensing first came into effect from 1 April 2023 and replaced the temporary “super deduction” which allowed trading companies to claim 130% of qualifying capital expenditure.
Slightly less generous, but still very welcome, the Full Expensing regime allows trading companies to claim tax relief on 100% on qualifying plant and machinery, including commercial vehicles, in the year of purchase.
At the budget on 30 October 2024, it was confirmed that this regime will be maintained permanently.
You may think this sounds similar to the AIA mentioned above, and you would be correct. However, there are a few differences:
- Full expensing is available to trading companies only
- Assets must be purchased new and not second hand
- Full expensing relates to plant and machinery only. There are further allowances for integral features which will be explained below
- Full expensing is currently not available for assets purchased for leasing. There are some exceptions to this where the asset is also provided with an operator. The government has committed to extending to include assets purchased for leasing when fiscal conditions allow.
Claiming 100% tax relief essentially means that businesses are saving up to 25p for every £1 spent, which is a really valuable saving.
Example:
A company has taxable trading profits of £500,000.
It spends £100,000 on a new piece of equipment,
Without a capital allowances claim, the tax charge will be £500,000 x 25% = £125,000
With a capital allowances claim:
Trading profits £500,000
Less AIA/Full expensing allowances (£100,000)
Taxable trading profits £400,000
Tax thereon at 25% £100,000
Therefore a tax saving of £25,000
Should the allowances be high enough to wipe out all of the taxable profit, putting the company into a loss position, this loss can be carried forward and offset against future trading profits, thereby saving tax in a future year.
Special rate first year allowances
This allowance relates to integral features which, as mentioned above, cover assets such as heating systems, air conditioning and lighting within a building. A warehouse would also be considered a building for these purposes so this will be worth considering if your company is carrying out a fit out or an upgrade to an existing warehouse.
The rules are the same as for Full Expensing, i.e the assets must be incurred in a trading company and must be new.
If eligible, the company can claim tax relief on 50% of the cost of qualifying expenditure.
Writing down allowances
For any item of plant and machinery that does not fall into the above, perhaps because the AIA limit has been exceeded and the Full Expensing rules do not apply, tax relief will be given on 18% of the asset cost, per year on a reducing balance basis.
Any integral features that are not covered by the allowances above will receive tax relief at 6% per annum on a reducing balance basis.
Whilst commercial vehicles qualify as plant and machinery, cars do not. Expenditure on cars will receive tax relief at 100%, 18% or 6% of the cost per annum depending on the emissions of the vehicle.
Structures and Buildings allowance
Structural works carried out on a building will qualify for an allowance called Structures and Buildings allowance. Companies can claim 3% of the cost of the asset, each year on a straight line basis. Allowances can only be claimed once the asset is complete and in use.
If you are planning on carrying out any warehouse building or refurbishment works, it is likely that all of the allowances mentioned above will be relevant. It is important to get as much detail as possible from your contractors to ensure that a full capital allowances claim can be made.
Assets purchased under lease agreements
The above allowances can be claimed on assets purchased under Hire Purchase agreements. The only added stipulation is that these assets must be in use before any Full Expensing allowances are claimed.
For assets purchased under finance leases, capital allowances do not apply and instead, companies can claim tax relief on the depreciation in the financial statements.
Next steps
Capital allowances are a vital tool for businesses, offering significant financial benefits that can enhance overall economic health. By allowing businesses to deduct the cost of qualifying assets from their taxable profits, capital allowances provide immediate tax relief, which can lead to substantial tax savings. This reduction in tax liability improves cash flow, enabling businesses to reinvest in their operations, purchase new equipment, and drive growth.
We would recommend speaking to a tax advisor when you are planning any capital investment to ensure they can ascertain all of the relevant information and claim as much tax relief for you as possible.
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