Capital allowances provide tax relief for expenditure by a business on certain capital assets. In effect they take the place of depreciation charged in commercial accounts, which is not normally deductible for tax purposes.
The relief is given by treating the allowances for a period as an expense to be deducted when arriving at the taxable business profits for that period. Allowances are given as a percentage of the expenditure which qualifies for relief. Balancing charges may arise when the business sells an asset on which allowances have been given and such charges are treated as taxable receipts of the business.
Allowances can be claimed by individuals, companies or partnerships which carry on a trade, profession or vocation or a property business. Allowances are only available if the asset falls within one of the specified categories.
The most common category is plant and machinery. A 100% allowance (the annual investment allowance) is available on the first £1 million of expenditure in a year and additionally a 100% allowance (a first-year allowance) is available for assets which meet particular specifications. To the extent that expenditure is not relieved in this way it is pooled and a writing-down allowance of either 18% or 6% is available.
Other common categories qualifying for allowances are structures and buildings for which an allowance of 2% each year over a 50-year period is given and research and development (100% in the first year). Less commonly encountered categories are mineral extraction, patents, know-how and dredging.