Capital Allowances have existed for 100 years — so why are they still underused?

Date: August 9, 2022

When we think about the tax reliefs available to UK businesses, it’s often assumed they are a modern invention.

But take a deeper look and you discover one of these schemes — Capital Allowances — has a far longer history than you may have imagined.

Capital Allowances are not a 21st, or even a 20th, Century innovation. Unbelievably, you need to go right back to the reign of Queen Victoria to find the beginnings of the UK’s Capital Allowances scheme.

Considering they’ve been around for so long, it’s surprising so many people out there still aren’t aware of them.


Longest reigning tax relief

Naturally, today’s scheme doesn’t exactly resemble its 19th Century incarnation. Prior to 1878, there were deductions available for expenditure when businesses renewed or replaced existing plant or machinery. From 1878, a ‘wear and tear’ deduction was introduced, providing tax relief for an amount broadly equal to the actual economic depreciation of the plant and machinery suffered during the year.


Instrumental in post-war rebuilding

It was in 1945, though, that Capital Allowances really came into their own. After the Second World War, much of British industry needed to be reconstructed.

To enable this, the Income Tax Act of 1945 superseded the previous system of wear and tear allowances. Its most generous reliefs included a 20% allowance for plant and machinery in the first year of purchase to encourage investment in equipment. An initial allowance of 10% for new buildings in the first year was also introduced to encourage investment in industrial premises.


Reforms every decade

Almost every decade since, there has been some kind of change made to Capital Allowances.

Sometimes these have aimed to make the system simpler to understand, sometimes they have only made things more complicated. Aspects removed in one decade have often been reintroduced in the next.

For instance, first-year allowances were introduced in the 1970s, phased-out in Nigel Lawson’s 1984 reforms, and then reintroduced in the early 1990s.

The changes of 2008 represented the biggest reform of the Capital Allowances system since the 1980s. These changes had three aims: to promote investment and growth, to reduce complexity, and to maintain fairness and refocus the tax system for smaller businesses.

Among the changes was the introduction of the Annual Investment Allowance, the most valuable form of Capital Allowances. It enables taxpayers to offset the cost of qualifying plant and machinery against their profits in the year during which the expense was incurred. However, since tax rules are ever-changing, the maximum threshold for this has also changed many times over the years.


Where are we now?

The biggest question is how after more than 100 years Capital Allowances are still underutilised and poorly understood.

The truth is that, despite all the reforms, it is still complex and, at times, downright confusing.

With different types of allowance relating to a wide range of items and accounting periods, it can be all too easy to underestimate what is eligible. To ensure you are not missing out, get in touch with our team of experts and see if you could make a claim.

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