Capital allowances are one of the most complex areas within UK tax legislation. A lot of the rules originally came from case law until the various decisions were legislated within the Capital Allowances Act of 2001.
Broadly speaking, capital allowances are a tax-approved form of depreciation. Whereas accounting principles allow businesses to depreciate business assets at different rates, the tax rules do not as it is unfair businesses would receive tax relief at different times.
Capital allowances are an attempt to give all businesses a level playing field.
Capital allowances provide tax relief for investments on plant and machinery employed permanently within a business. The rules make great distinctions between assets used in the business and the setting of the business.
Over the years this definition has been extended and finessed so that, in order to calculate the capital allowance claim, we need to look at:
- Exactly what the asset is – Plant? Machinery? Building?
- What it is used for
- How long its useful life is expected to be.
Obvious examples of plant and machinery which qualify for plant and machinery include machinery, vans, office furniture but the rules also extend to less obvious examples such as air conditioning and water systems.
There are also different rates of capital allowances – the tax break may be given at 100%, 18%, 6%, 3% or even 130% of the cost of the asset.
Capital allowances are a key tax break offered by the Government to encourage businesses to invest and stimulate growth.
Currently there are two major capital allowances within the system: the Annual Investment Allowance and the Super Deduction. The latter was announced in the 2021 Budget at a rate of 130% and applies to companies only until 31 March 2023 – further details can be seen in our blog here. The former was first introduced by the Labour Government in 2008 and has changed nearly every year since then, the relief has ranged from as low as £25,000 to as high as £1,000,000. From 1 January 2022 the Annual Investment Allowance will reduce to £200,000.
The level of tax relief at stake has created lots of debate of what qualifies for plant and machinery or not. Many household names have been involved, including Wetherspoon’s, Burnley Football Club and Scottish & Newcastle – all of which looked at the difference between “function” and “setting”.
The capital allowances legislation is an extraordinarily complex area of tax legislation, – establishing the correct claim is not straightforward and you will need expert knowledge to get to the correct answer.