- Plant and machinery allowances (PMAs)
- Structures and buildings allowance (SBA)
Capital allowances in a nutshell
Capital allowances enable businesses to write off the cost of capital assets against taxable income. Broadly speaking, they take the place of depreciation, which is not an allowable deduction in computing taxable profits. Allowances are only available, however, for expenditure falling within specified categories, and the rate of relief differs according to the category (from as little as 3% per year to as much as 100%).
What types of allowances can be claimed?
The main categories of expenditure for which capital allowances can be claimed are:
- plant and machinery
- structures and buildings
Other current categories of allowances are research and development, mineral extraction, dredging and, for taxpayers other than companies, patents and know-how.
When can plant and machinery allowances be claimed?
A company, individual or partnership which carries on a trade, property business or other qualifying activity can claim capital allowances for capital expenditure incurred on the provision of plant or machinery for the purposes of that trade etc. The business must generally own the plant or machinery as a result of the expenditure.
What are plant and machinery?
Neither ‘plant’ nor ‘machinery’ is comprehensively defined. ‘Machinery’ is straightforward but ‘plant’ is more difficult to define and so has been the subject of many court decisions. The decisions distinguish between something which performs a functional role in the business (which will usually be plant) and something which forms part of the setting or premises in which the business is conducted (which will not).
There are specific rules which prevent buildings, parts of a building (such as walls and windows) and structures (such as tunnels, roads and car parks) from qualifying as plant and machinery. Conversely, ‘integral features’ of a building (including electrical and water systems and lifts) are explicitly treated as plant and machinery.
What allowances are available for plant and machinery?
Three types of allowance are available. The annual investment allowance (AIA) is equal to 100% of the expenditure and is given in the year in which the expenditure is incurred. It is subject to an annual maximum which is currently £1 million but will reduce to £200,000 from 1 January 2021. Companies are entitled only to one annual maximum and groups of companies must divide a single maximum between them. First-year allowances (FYAs) are also a 100% allowance given in the year the expenditure is incurred, but only on limited types of asset.
If expenditure does not qualify for AIA or an FYA, writing-down allowances (WDAs) can be claimed. Expenditure is allocated to a pool of expenditure and WDAs are given at a rate of 18% per year (for the main pool) or 6% (for the special rate pool) on a reducing-balance basis.
What happens on disposal of the plant or machinery?
On the disposal of an item of plant or machinery in respect of which an AIA, FYA or WDAs have been given the proceeds must be deducted from the balance in the appropriate pool. If the proceeds are greater than the balance, a balancing charge equal to the difference will arise.
When can structures and buildings allowance (SBA) be claimed?
Individuals, partnerships and companies carrying on a trade or property business who incur capital expenditure on the construction of a commercial building or structure can claim an SBA for that expenditure over the 33 and 1/3 years following first use. SBA is also available where a business purchases such a building or structure, but in that case the amount of expenditure which qualifies for the allowance will depend on the circumstances of the purchase.
In either case, the construction of the building must have begun on or after 29 October 2018 and the contract for construction works must have been entered into on or after that date.
An SBA can also be claimed for expenditure on renovation or conversion of a part of an existing building, together with expenditure on repairs incidental to the renovation or conversion. Expenditure incurred on or after 29 October 2018 may qualify even if the building was constructed before then.
What is the rate of structures and buildings allowance?
SBA is given at a rate of 3% of the qualifying expenditure per year on a straight-line basis over the 33 and 1/3 years starting with the building’s first use. Before April 2020 the annual rate was 2%.
What happens on disposal of the building or structure?
On the disposal of a building or structure for which SBA has been claimed, the seller’s SBA stops. The buyer, if entitled, can claim the annual allowance of 3% of the original qualifying expenditure for the remainder of the 33 and 1/3 year period. There are no balancing allowances or charges. Instead, adjustments may be made to the capital gains computation on the disposal.
How are allowances given?
Capital allowances are given by treating the amount of the allowance as a deduction in computing the taxable profits of the trade, business or other activity. Balancing charges are treated as receipts of the trade etc.
How are allowances claimed?
Capital allowances must be claimed in the tax return of the individual, partnership or company so that the time limit for the claim is the same as that for making or amending the return.