View the related Tax Guidance about Annual investment allowance
Capital allowances ― overview
Capital allowances ― overviewDefinition of capital allowancesIn the broadest sense, capital allowances are a form of tax-approved depreciation. Depreciation, as calculated under GAAP, is not an allowable deduction in computing the chargeable profits of a trade because it is an item of a capital nature. See the Capital vs revenue expenditure guidance note. Instead, relief is given by treating the capital allowances as an expense to be deducted when arriving at the taxable trading profits. Likewise, any charges are treated as taxable receipts. In addition to traders (self-employed individuals, partnerships or trading companies), capital allowances can also be claimed by for expenditure incurred by property businesses and certain other qualifying activities. See the Capital allowances ― general requirements guidance note.The Capital allowances ― definition video provides a summary overview of capital allowance definitions including what qualifies as plant and machinery, the treatment of buildings and integral features.Summary of rates ― capital allowancesThe following table summarises the main capital allowances available, the rate of the allowance and if relevant any important dates or points to note, for further details including any relevant qualifying conditions or restrictions see the relevant guidance note as linked in the table.DescriptionRelevant assetsRateGuidance notesNotesSuper-deductionExpenditure on new plant or machinery by companies which would normally qualify for 18% writing down allowance but excluding cars130%Super-deduction and special rate first year allowanceExpenditure must be incurred on or after 1 April 2021 but before 1 April 2023,
Struggling businesses ― how to ease cash flow
Struggling businesses ― how to ease cash flowIf OMBs are struggling to maintain their cash flow and are maybe looking to obtaining debt from outside sources, this guidance note provides a summary of tax areas that can be reviewed with your OMB corporate clients that can help with cash flow and accessing funds.Maximising capital allowance claimsCapital allowances are a valuable tax relief for OMBs, and maximising any claims can help improve cash flow. Specific areas to review are as follows:Super-deduction and special rate first year allowanceThe super-deduction and special rate first year allowance (SR allowance) are temporary reliefs available to companies which incur qualifying expenditure on plant or machinery between 1 April 2021 to 31 March 2023. There is no upper limit to the level of expenditure that attracts these allowances.The reliefs operate as follows:•a super-deduction of 130% allowances is available on new plant or machinery that is not special rate expenditure, ie it would ordinarily qualify for the 18% main rate writing down allowance, and•a first year allowance of 50% on new plant or machinery that qualifies as special rate expenditure, ie it would ordinarily qualify for the 6% rate writing down allowance. This is called the SR allowanceWhere assets are disposed of, on which either of these reliefs were claimed, there will be a balancing charge on disposal. The calculation of the balancing charge is different depending on which relief was originally claimed.For more details, see the Super-deduction and special rate first year
A–Z of capital allowances
A–Z of capital allowancesWhat capital allowances are available?When calculating taxable profits or allowable losses for a business, it may be possible to claim capital allowances on expenditure on items which are capital in nature. There are various types of capital allowances available with the most common type being plant and machinery. To be able to claim capital allowances, the expenditure must be qualifying expenditure for the type of allowance being claimed. For some allowances, qualifying expenditure is defined by the legislation, but for others there is case law which determines whether the item is qualifying.This schedule is an alphabetical list of items and their treatment for capital allowance purposes based on CAA 2001 and also on decided cases. The availability of any allowance will be subject to the qualifying conditions for that allowance being met and the relevant guidance note, legislation and HMRC guidance should be reviewed to confirm the position (although HMRC guidance does not have the force of law). Items in the list may also qualify for the annual investment allowance on plant and machinery or the temporary super-deduction and special rate first year allowance available for companies. For more details, see the Annual investment allowance (AIA) and Super-deduction and special rate first year allowance guidance notes.The list is not exhaustive but a summary of the more common types of assets ― to search for an item on the page, use ‘Ctrl+F’. For a detailed discussion of the meaning of plant and machinery, see Simon’s Taxes B3.306.
Basis period reform ― frequently asked questions
Basis period reform ― frequently asked questionsThe following is a summary of frequently asked questions relating to the basis period reform which has a start date of the tax year 2024/25 with a transitional period in 2023/24. For details on how the basis period reforms will work and the method of transition, see the Basis period reform guidance note.Does a business have to change its accounting year end to match the tax year?No, a business can maintain an accounting year which does not match the tax year but for the purposes of completing their tax return, the business will need to apportion profits or losses to tax years. This should be done by reference to the number of days in the periods but other methods including using weeks or months can be used if they are reasonable and used consistently. Where an accounting period ends later in the tax year, eg 31 December the accounting period may not have ended when the apportionment is being done and so an estimation of the profits or losses would need to be done with a revised return being submitted once final figures are known although HMRC is exploring other options to reduce the administrative burden through a consultation. HMRC has not confirmed whether initially submitting estimated figures and then providing an amended return would extend the enquiry window for that tax return.Businesses that have a 31 March year end will be treated as having an accounting period that matches the
Capital allowances for sole traders and partnerships
Capital allowances for sole traders and partnershipsSome aspects of capital allowances only apply to sole traders and partnerships, these are as follows:•private use of assets which qualify for capital allowances eg cars•capital allowances on know-how•capital allowances on patentsEach of these is detailed further below.Private use adjustmentsSole traders or partnerships may use assets for both business and private purposes. For example, it is common for a sole trader to have a car which is used mainly for business, but at the weekends or in the evenings, used for private purposes. If all the costs of running the car are paid for by the business, the tax computations must be adjusted to take account of the private use. Therefore, motor expenses in the profit and loss account are reduced for the private element of those costs.Likewise when considering the capital allowance computations, the capital allowance must be reduced by the private element. The private element is normally given as a percentage which is then applied to the computations. In practice, the private usage may need to be agreed with HMRC.This is only applicable where the car is owned by the sole trader or partner. It is necessary to consider whether this is the case, or whether the car is in fact leased. See the Capital allowances on cars guidance note for further information.Private use adjustments never apply to companies.The director of the company might use a company car for his private purposes. However, this will not affect the
Agricultural buildings
Agricultural buildingsDefinition of plant not buildingA large amount of expenditure in relation to a modern building relates to items of plant and machinery. The farmer or landowner may identify such expenditure and claim the appropriate capital allowances and annual investment allowance (AIA) in accordance with the rates available. These are generous with the AIA limit at a temporary level of £1,000,000 to 31 December 2021. All appropriate conditions must be met. See the Annual investment allowance (AIA) guidance note for more information.The ability to claim AIA on plant applies as much to a second-hand building as a new one. It can be quite normal practice for farmers to buy second-hand barns. The apportionment between the categories depends on the valuation techniques and requires knowledge of building construction.The ‘after-tax’ cost of funding a new diversified venture will be affected by whether expenditure is treated as buildings or plant. There may well be borderline cases where planned expenditure could be regarded as plant. However, there are certain items of expenditure where the legislation is clear as to what it deems to be plant alterations to buildings incidental to the installation of plant. HMRC has agreed that silage clamps and slurry pits qualify as plant and machinery. With nitrate vulnerable zone legislation placing more pressure on the farmer to have increased storage capacity, this is a useful area of tax planning when introducing new silage clamps and pits.Items that are buildings or structures may qualify for the structures and building
Special rate pool and long life assets
Special rate pool and long life assetsSpecial rate poolExpenditure on some types of plant or machinery must, if neither annual investment allowance (AIA) nor first year allowances (FYAs) are available, be allocated to a ‘special rate pool’. Expenditure to be allocated to the special rate pool consists of expenditure incurred on:•integral features, see below•long life assets, see below•thermal insulation of buildings used in a business•new or second-hand cars with CO2 emissions of more than 50g/km (reduced from more than 110g/km in April 2021), and•solar panelsCAA 2001, s 104A(1)The annual writing down allowances available on the special rate pool is 6% from 1 April 2019 (corporation tax) and 6 April 2019 (income tax). Prior to these dates, the special rate was 8%. Expenditure that would otherwise fall into the special rate pool is eligible for the AIA, with the exception of cars and certain other exclusions, see the Annual investment allowance (AIA) guidance note. In some cases, expenditure may also be eligible for FYAs if it meets the necessary conditions, see the First year allowances guidance note. There is also a temporary first year allowance of 50% for new special rate plant and machinery acquired from 1 April 2021 to 31 March 2023 but only for companies, see the Super-deduction and special rate first year allowance guidance note. The 6% WDAs for the special rate pool is significantly lower than the 18% rate for the general pool. The time taken to receive 80% of the
Introduction to year-end tax planning
Introduction to year-end tax planningIntroductionThis guidance note considers various aspects of year-end tax planning for large companies or groups. It is recommended that it is read in conjunction with the Chargeable gains planning, Group companies and Year end tax planning ― international issues guidance notes so that as many relevant factors as possible are considered. See also ‘Key issues for in-house tax teams: a checklist’, by Chris Holmes, Mark Ellis, and James Egert, in Tax Journal, Issue 1511, 14 (27 November 2020).Other matters which could be relevant, depending upon the tax profile of the company, are:•whether deductions for expenditure on intangible fixed assets (IFAs) are being maximised ― see the What is an intangible fixed asset? guidance note•whether deductions for loan relationships are being maximised ― refer to the What is a loan relationship? and Taxation of loan relationships guidance notes•real estate investment trusts (REITs) ― for the advantages and disadvantages of this regime to companies in the property sector, see the Real estate investment trusts (REITs) guidance note•review of time limits for claims and elections ― see Simon’s Taxes D1.1345When undertaking any planning exercise, companies and their advisers should consider whether any relevant anti-avoidance provisions, Disclosure of Tax Avoidance Schemes and the General anti-avoidance rule are likely to apply. See the Disclosure of tax avoidance schemes (DOTAS) ― overview and
First year allowances
First year allowancesFirst year allowances (FYAs) are available on the following items:•new and unused cars with low CO2 emissions, or car is electric•new and unused zero-emission goods vehicles•new electric vehicle charging points•gas refuelling stations•expenditure on new plant or machinery which qualifies as a special rate asset and is incurred on or after 1 April 2021 and before 1 April 2023 (companies only), see the Super-deduction and special rate first year allowance guidance note•plant and machinery for use primarily in an area which is a designated assisted area in an enterprise zone (companies only)•plant and machinery for use primarily in an area which is a designated tax site in a freeport (companies only)These are detailed further below. First year tax credits were abolished from April 2020, although there is still a four-year clawback period, see Simon’s Taxes B3.324H.Low emission carsThe amount of capital allowances available for cars are based on levels of CO2 emissions, as established at manufacture. From 1 April 2021, the limit is 0g/km. From 1 April 2018 to 31 March 2021, the limit was 50g/km.Please refer to the Capital allowances on cars guidance note for further commentary.Zero-emission goods vehiclesFYAs at a rate of 100% are available for expenditure incurred on new goods vehicles which do not emit any CO2 when driven. Expenditure qualifies for FYAs if the following conditions are satisfied:•it is incurred in the period beginning 1 April 2010 and ending 31 March 2025 (corporation tax) or the
Income tax implications of incorporation
Income tax implications of incorporationThe Incorporation ― introduction and procedure guidance note summarises various tax implications of incorporating a business. This note provides further details of the income tax aspects which include:•closing year rules / overlap profits•capital allowances•stock•loss relief optionsThese are covered further detail below.Closing year rulesThe incorporation of a business by a sole trader or partnership brings about a cessation of trade for income tax purposes. The closing year rules will therefore need to be considered, including relief for overlap profits.In particular, if the overlap profits are significantly greater than current profits for an equivalent time period, the cessation of the trade may trigger a substantial loss for which no relief is available. Careful choice of cessation date may help with this issue.See Example 1 and Example 2 for illustrations of cessation planning. For more guidance, see the Basis of assessment ― closing years guidance note.Capital allowancesIf any plant and machinery is purchased in the final accounting period, no annual investment allowance (AIA), first year allowances or writing down allowances are available in that period. Where a trader has made substantial investment in capital items in the final period of trade, there is clearly an issue especially where profits are available which could be reduced by capital allowances. Consideration should therefore be given to delaying incorporation until after the end of the tax year.For example, a trader with a year-end of 31 March 2021 who has
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