There is a lot of confusion around Capital Allowances, with many business executives still unaware of what qualifies and how to claim this potentially valuable tax relief.
A quarter of companies that own commercial property are not even aware they can claim them, according to our own research.
Since the average Capital Allowance claim is worth £48,000 per year, these companies are missing out on a major revenue boost.
This widespread lack of knowledge exists despite the fact that Capital Allowances are probably the oldest tax relief out there, with some form of it available in the UK for more than a century.
How is it that after more than 100 years businesses still find it difficult to get to grips with this outwardly straight forward tax reward?
The answer is that unfortunately it is complex and, at times, downright confusing. While any accountant will have a basic understanding of Capital Allowances, most lack the detailed knowledge needed to ensure clients are claiming everything they could.
So first, what are Capital Allowances?
Capital Allowances tax relief offsets the hidden expenditure in your commercial property against your tax bill. Any UK taxpayer who owns commercial property, personally or through a limited company, may be eligible to claim Capital Allowances tax relief, which was created by HMRC to incentivise greater investment in commercial property.
It usually applies to spending on permanent fixtures within the building such as air conditioning, electrics, heating and lighting but in some cases can even extend to windows or project management costs.
These costs can be deducted from your profit, therefore reducing your tax bill.
This sounds straightforward enough. However, the eligibility and value of the claim depends on multiple criteria and this is where things get complicated. The tax law on what does and does not qualify is complex and constantly being tweaked and updated. And Capital Allowances come in different forms, all of which work in different ways.
Types of capital allowances:
Annual investment allowance (AIA)
Often confused with Capital Allowance relief itself, AIA is actually just one form of this tax break, which enables companies to offset the full cost of most plant and machinery items against their profits in the year during which the expense was incurred. It is the most valuable form of Capital Allowance.
AIA is available for virtually all plant and machinery used in a business such as general equipment, computers, vans as well as some fixtures such as fitted kitchen units. It can also be claimed on alterations made to install plant and machinery and the costs associated with demolishing and removing them.
Cars are not included under AIA. Nor are items which were originally purchased for another reason before they were used in a business or items given to a business.
The government is constantly altering the annual limit for AIA claims — it has changed several times in the last 10 years — so always check this with HMRC.
The AIA limit has been temporarily hiked from £200,000 to £1million between 1 January 2019 and 31 December 2020. This was a clear move to incentivise UK businesses to invest now rather than hold off on major capital outlays due to the current political uncertainty, and thus boost dwindling business spending.
As the most valuable form of capital allowance, it is worth ensuring that every single item that can be categorised under AIA is accounted for. Often many things are missed because no-one has realised they qualify. Done properly, this usually requires a detailed survey of your commercial property and inventory by someone with an extensive experience of AIA eligibility.
Writing down allowances
If a business exceeds the AIA annual limit or has items that fall outside of AIA, it can claim writing down allowances. These allow the business to deduct a percentage of the value of an item from their profits each year.
The percentage value that can be deducted varies with different items between 18% and 8%. For cars, the rate is dictated by their CO2 emissions. Again, correctly pooling items to ensure you are maximising your claim potential requires experience.
First year allowances
This type of capital allowance can be claimed alongside AIA and does not count towards a business’s AIA limit.
First year allowances can be claimed on certain low CO2 emission cars, energy and water saving equipment, gas, biogas and hydrogen refuelling equipment as well as zero emission goods vehicles.
If a company doesn’t claim all the first year allowances it is entitled to, it can claim part of the cost in the next accounting period using writing down allowances.
Underclaiming
With different types of allowance relating to a wide range of items and accounting periods, it is not surprising many business executives get confused. It is the job of accountants to guide them through this tricky process but even accountants may not have much experience of such tax claims.
The most common issue is accountants vastly under claiming for businesses due to a lack of time to properly assess the company’s eligible assets and limited understanding of the system.
We did some research last year which showed business executives underestimated the average value of a Capital Allowances claim by nearly £20,000.
As an example, we recently undertook a review of the Capital Allowances entitlements for the landlord of our new office near Manchester and we were able to identify £85,400 of unclaimed Capital Allowances.
This is because, while accountants will claim for businesses on everyday expenses and purchases like chairs, tables and computer equipment, the majority lack the training to dig deeper.
A full on-site survey is only effective when paired with a full understanding of what HMRC says does and does not qualify under certain stated categories,
So a whole new skillset is needed to accurately assess a commercial property’s cost and place values on the qualifying plant and machinery within, from air conditioning to plumbing.
This is where accountants can benefit their clients by working in partnership with experts in capital allowances or by training themselves to gain much greater knowledge in this field.
With about two thirds of companies we work with owning commercial property, it’s knowledge worth having.
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