Understanding Capital Allowances

Entrepreneurs qualify for tax allowances, known as capital allowances, on certain purchases and investments. A basic understanding of the rules, and how to claim, not only saves money but encourages business expansion.

Buildings

Entrepreneurs can claim capital allowances when they convert or improve empty business premises in a disadvantaged area, or change the space above commercial premises into flats for rent.

Capital allowances do not apply to work done on shops, offices, showrooms, or houses; the cost of land (either freehold or leasing); the building of extensions that don’t give access to qualifying flats; the development of land next to an existing business; or the purchase of furniture for qualifying flats.

The capital allowance for converting and renovating business premises in disadvantaged areas, or turning empty space above commercial property into flats, is 100% of the cost. A 100% capital allowance also applies to the building costs of industrial and commercial properties in enterprise zones.

Plant and Machinery

Plant and machinery includes computers, furniture, tools, cars, and vans. The standard capital allowance for purchases of this business equipment is 20% per year. From the 2008/9 tax year, businesses also have an annual investment allowance (AIA) for the first £50,000 of plant and machinery expenditure. The AIA has replaced the former system of a 50% allowance for small businesses in their first year of trading (40% for medium-sized businesses).

Some small business entrepreneurs spend less than £1,000 on plant and machinery in a 12 month accounting period. If so, they can claim a capital allowance up to £1,000.

Entrepreneurs who buy plant and machinery on hire purchase claim a capital allowance on the item’s original cost. Hire purchase interest and administrative charges are business expenses.

Research and Development

Some types of research and development expenditure qualify for capital allowances. The allowances come in the form of tax credits. Small and medium-sized businesses can obtain tax credits equivalent to tax relief of 175% of appropriate spending. Large businesses can claim 130%.

As a guide, research and development refers to innovation and creativity in the fields of technology and science. The research must be relevant to an entrepreneur’s business. An entrepreneur must also be a trader rather than someone working in a vocation or profession.

Short-Life, Long-Life, and Leased Assets

The 20% capital allowance for plant and machinery applies to items likely to last five years or more. If entrepreneurs have equipment they won’t keep for five years, or if it will wear out within this time, they can calculate the capital allowance on the projected life.

If entrepreneurs have an asset that should serve for 25 years or more, they may be able to use an allowance of 10% a year.

Entrepreneurs who lease assets to other people can still claim capital allowances (but not a first year AIA).

Making a Claim

Entrepreneurs should make their claims for capital allowances on their income tax or corporation tax returns.

Capital Gains Tax Allowances

Entrepreneurs who sell businesses, limited company shares, securities, or other business assets can claim capital gains tax allowances from HM Revenue & Customs. The allowances include an annual exemption figure and entrepreneurs’ relief. Various conditions apply to the latter.