Capital Allowances – Use it or Lose it!

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In the latest UK200Group blog post, Mike Chapman, Senior Manager, Corporate Tax, at Knill James Chartered Accountants discusses the potential value of Capital Allowances.

Whereas the depreciation charge in a business’s accounts is not eligible for a tax deduction, capital allowances can provide a valuable statutory tax relief for taxpayers on the cost of certain capital goods. Since 1 January 2016 businesses have been able to claim 100% of such expenditure, up to a ceiling of £200,000 per annum, by way of an Annual Investment Allowance (AIA) against taxable profits. At a current corporation tax rate of 19%, this equates to a yearly tax saving of £38,000 while for unincorporated business, taxed at income tax rates, the saving could be as high as £90,000. It is therefore vitally important for businesses and their agents to optimise the AIA which is applied on a ‘use it or lose it’ basis.

Whereas taxpaying individuals and companies readily understand that expenditure on moveable capital goods that perform a function in their business, such as IT equipment, qualifies for the AIA, the opportunity to claim allowances when acquiring property, either new or second hand, is commonly overlooked.

Every commercial property has qualifying plant and machinery embedded in it, including electrical systems, plumbing, air-conditioning and the like which can be subject to a claim in almost exactly the same way as loose capital items. Such embedded assets, legally part of the premises, are collectively known as ‘fixtures’.

Depending on the nature of the building and its specification there will be a range of fixtures on which capital allowances can be claimed. Some buildings, such as hotels and care homes, have more of these than others and the value of the tax allowances can be material to the property transaction.

Due to a tightening of the rules by HMRC between 2012 and 2014 the mechanics of fixtures claims have become progressively more complex. It is therefore vitally important to involve a tax practitioner at an early stage of a property transaction, whether buying selling or refurbishing, in order to ensure that tax breaks are exploited or to prevent tax charges being created unwittingly.

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