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Capital allowances for tax explained

About capital expenditure

Expenses that you incur in your business can be either revenue (trading) expenses or capital expenditure.

​Revenue expenditure
​Capital expenditure

​Your day to day expenses of running the business like salaries, fuel, rent, stationery and utilities or the expense of repairing and maintaining an asset like your work van.

​An asset you buy that will have a lasting benefit for the business like equipment, machinery or a business vehicle. These items are known as plant and machinery.

​These are claimed as a deduction in your accounts.
​You can't claim for the cost of these items as a deduction, but you may be able to claim capital allowances.

Claiming capital allowances

If you spend money on capital assets for use in a business, you can't claim a tax deduction for that expenditure. Instead a deduction called capital allowances may be available.

Capital allowances have the effect of spreading tax relief for the cost of capital equipment over a number of years.

The allowances are due if the capital equipment is provided wholly and exclusively for the purposes of the business and belongs, or has belonged, to the trader.

The capital equipment qualifying for tax relief is restricted to plant and machinery.

Buildings do not usually qualify for capital allowances but plant and machinery contained within the building may be claimed. The exception to this is glasshouses, for which there is a different capital allowance rate.

Broadly, plant or machinery is equipment that has a productive life of more than two years.

Capital allowance percentages

The allowance for plant and machinery is 25% per annum and for glasshouses 10% per annum.

The cost of the capital equipment is placed into a pool of expenditure and the allowance is given, broadly, on the value of the pool at the 31 December each year. This pool value must be reduced, however, by the disposal value of any capital equipment sold or disposed of in the year or period before the allowance is calculated.

Items which may not be placed into a pool are machinery or plant provided only partly for the purposes of the business, because the private element must be excluded.

Glasshouses, which have a different rate of allowance, will have their own pool.

If the disposal value of what you sell (eg on cessation of trade) exceeds the value of the pool, a balancing charge arises and you will be assessed on the amount of the charge. This is the method by which excess relief for capital expenditure is recouped.​​

Capital allowances guide

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