Changes to Capital Allowances and how it may affect your business

While perhaps not the most exciting of tax reliefs, it is hugely valuable to businesses of all sizes.  Whether you are a manufacturing business investing in heavy machinery worth several thousands of pounds or a small consultancy business buying in some IT equipment, the effect of claiming capital allowances can make a big difference to your annual tax liability.

Annual Investment Allowance

This is the big one.  It allows a business to write-off 100% of expenditure on qualifying plant and machinery in the year of acquisition, but only up to a certain limit.  That limit has been yo-yoing up and down over the past ten years but is now at an all-time high at £1m per annum with effect from 1 January 2019.  The Government have confirmed that this is for a two-year period only and so businesses contemplating a big capital expense may wish to do so before 31 December 2020.  Note however that complex calculations apply to the apportionment of the AIA if your accounting period does not end on 31 December.

General and Special Rate Pools

For expenditure which does not qualify for the Annual Investment Allowance, a writing down allowance is given, essentially a form of tax depreciation.  Most capital assets will fall within the main rate pool and receive writing down allowances of 18% on a reducing balance basis.  Certain assets however need to be allocated to a special rate pool, including certain long-life assets, thermal insulation and integral features to a building.  The writing down allowances on assets allocated to the special rate pool was reduced with effect from April 2019 from 8% to 6%, having a negative effect on businesses with assets falling within this pool.

Energy Saving Plant and Machinery

Currently a business investing in energy-saving plant and machinery is entitled to a 100% deduction against profits of the costs associated with acquiring and installing the equipment, providing it is on the Government’s Energy Technology List or Water Technology List.  This scheme is set to end in April 2020, although assets acquired from this date may still qualify for the Annual Investment Allowance and gain 100% relief.

Structures and Building Allowance

The Government announced in the October 2018 Budget a new capital allowance regime for structures and buildings.  This will apply to costs incurred on or after 29 October 2018 on new non-residential structures and buildings.  It will allow capital allowances to be claimed at a rate of 2% per annum on a straight-line basis.  While this may sound like a low rate, it will apply to expenditure on which no capital allowances can currently be claimed and likely to apply to high-value expenditure so could make a material difference to a business’s annual tax liability.