The term capital allowances is used to describe the allowances available to businesses to secure tax relief for certain capital expenditure. The rules that govern the purchase of capital equipment such as computer equipment, vehicles and machinery by businesses are different to those for day to day business expenses claims.
A Writing Down Allowance (WDA) is available for plant and machinery expenditure that exceeds the Annual Investment Allowance (AIA) and which does not qualify for a First-Year Allowance as well as for residual balances of expenditure that has been carried forward from the previous accounting period. The WDA is based on the cost of the items in the year they are acquired.
There are two rates of WDA for plant and machinery. To calculate them, you first group your expenditure into different pools:
- the main pool – this includes expenditure on most items – the rate is 18%
- the special rate pool includes special rate expenditure including long-life assets, integral features, certain thermal insulation and some cars – the rate is 8%.
Integral features are:
- lifts, escalators and moving walkways
- space and water heating systems
- air-conditioning and air cooling systems
- hot and cold water systems (but not toilet and kitchen facilities)
- electrical systems, including lighting systems
- external solar shading
It is important to note that the capital allowances regime for integral features only applies to the above list and that buildings themselves don’t qualify for capital allowances. However, it is worth taking professional advice if you have, or are considering the purchase of, a commercial building with integral features in order to maximise claims for tax relief. Please call for more advice.