Tax relief for capital expenditure

Contents
1. Introduction 1.1. How much you can claim 2. Example of standard allowance calculation

You are permitted to claim for capital expenditure in certain instances. This tax relief is known as capital allowance.

You can claim capital allowances on:

• the cost of vans and cars, machines, scaffolding, ladders, tools, equipment, furniture, computers and similar items you use in your business
• expenditure on plant and machinery
• items you used privately before using them in your business

You cannot claim for things you buy or sell as your trade - these are claimed as business expenses. If you buy on hire purchase, you can claim a capital allowance on the original cost of the item, but the interest and other charges count as business expenses.

See our 'Taxation' article for more information

If you're buying equipment from April 2012 onwards, 18% of the purchase price is the standard annual allowance for businesses each year. There is a special rate of 8% which applies to expenditure on integral features of buildings, like electrical systems, equipment with a planned life over 25 years and thermal insulation. In several cases you can claim 100% in the year you make the purchase:

• you may be able to claim research and development capital allowances on assets you purchase for the purposes of carrying out R&D
• you can claim 100% first-year allowances on investments in new equipment designated as energy-saving or water-efficient technology
• you can claim 100% allowances for new cars with CO2 emissions no greater than 110 grams per kilometre(gm/km) driven provided that:
• the car is 'unused and not second hand', and was bought on or after 6 April 2009
• it is an electric car, or a car with CO2 emissions of not more than 110gm/km driven
• For cars bought before 6 April 2009, the allowance is tied to the sum that you paid for the car. Where you paid up to £12,000 for a business-only vehicle, you can claim an allowance of up to 20% per year.
• First-year allowances of 100% are also available for equipment for refuelling vehicles with natural gas, biogas or hydrogen.

A builder purchases a digger for £16,000. Starting in the year of purchase, their capital allowances are as follows:

Year 1: 18% of £16,000 = £2,880 writing down allowance, leaving £13,120 as the reduced balance of the cost;

Year 2: 18% of £13,120 = £2,361.60 writing down allowance, leaving £10,758.40 as the reduced balance of the cost;

Year 3: 18% of £10,758.40 = £1,936.51 writing down allowance, leaving £8,821.89 as the reduced balance of the cost.

Suppose that the builder's trading profits are £50,000, £60,000 and £70,000 for Years 1, 2 and 3 respectively. The builder's income for tax purposes is as follows:

Year 1: £47,120;

Year 2: £57,638.40;

Year 3: £68,063.49.

Originally, for the 2012/13 tax year, all businesses had an Annual Investment Allowance (AIA) on the first £25,000 of expenditure on plant and machinery. However, this was increased on 1 January 2013 to £250,000 – the increase is temporary and is expected to return to £25,000 on 1 January 2015. There is also a tax credit for losses incurred through capital expenditure on some types of environmentally-friendly technologies. In addition, some smaller businesses may be able to claim a plant and machinery writing-down allowance of up to £1,000 where the balance of the pool is less than £1,000 in a 12-month accounting period.