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Capital Allowances

The following is a brief outline of relevant issues; it is not a comprehensive guide, for specific enquiries contact Property Taxation Specialists.

As a business you can claim tax allowances, called capital allowances, on certain purchases or investments. A proportion of these costs can be deducted from your taxable profits and reduce your tax bill. In certain circumstances an individual can also claim capital allowances.

Where a company is loss making in some situations a tax credit may be paid

A claim on allowable expenditure can be carried back to the year in which it was made within a two year window, for example if expenditure was incurred in June 2008, in the 2008/2009 tax year a claim can be submitted for that tax year up to the end of January 2011. However if expenditure was incurred in June 2006, a claim would be allowed in 2010 but only against those tax years which were still Ďopení.

Capital allowances are available on plant and machinery, some buildings, and conversions and renovations of those buildings and on research and development expenditure. Due to a range of legislative changes different levels of allowances are available for various years.

Plant and machinery allowances may be claimed on a range of items including cars, furniture, equipment and items which form part of the building in which the business is conducted. A surprisingly large range of items qualify as plant and machinery and these can be broken down into three main categories;
  • Integral features.
  • Plant and machinery.
  • Long and short life assets.

Integral features are treated in the same way as long life assets. A long life asset is one which has an economic life of 25 years or more. In buildings integral features are specified by statute and comprise, cold water systems, external solar shading, lifts escalators and moving walkways, active facades electrical systems including lighting, space or water heating systems, powered ventilation systems, air cooling or purification systems, together with floors and ceilings integral to the system. In addition allowances can be claimed on thermal insulation installations.

Conventional plant and machinery assets include sanitary fittings, showers, automatic door closers, alarm systems and the like. As well as equipment; actually used in the trade and performing a function therein.

All businesses may claim an Annual Investment Allowance, for the tax years 2008/2009 and 2009/2010 the allowance is some £50,000 per annum. For the tax years 2010/2011 and 2011/2012 it is £100,000 per annum, and from April 2012 it will fall to £25,000 per annum. This is a very valuable allowance and all items of expenditure which can be included in it have an effective writing down allowance of 100%.

At present the annual writing down allowance on plant and machinery is some 20%, which will fall to 18% from April 2012. Integral features and long life plant attract writing down allowances of 10% falling to 8% from April 2012.

Short life assets are items such as computers or computer software which have a limited economic life and can be written down over 4 years. Treatment as a short life asset is made by an election by the taxpayer.

In some circumstances allowances may attract 100% allowances; these are research and development allowances, energy saving plant and machinery, business premises renovation allowances [up to April 2012], flat conversion allowances.

The right to claim capital allowances may be created either directly, by purchasing the asset or indirectly by purchasing qualifying plant and machinery as part of a larger transaction, for example the purchase of an office block. Depending on the nature of the property involved there may be a greater or smaller amount of available allowances, a computer centre or luxury hotel may have a P&M content of 50%-80%, a small factory unit may only have a P&M content of 5%.

The amount and value of the P&M is identified by apportionment of the total purchase price. However the ability to claim may be on one of three bases, unrestricted, subject to restriction or subject to an election. Due to legislative changes a claim may also be partially restricted. The restrictions occur where a previous owner of the property has made a claim since July 1996. However in a property subject to restrictions an unrestricted claim may still be made for any new expenditure incurred on qualifying P&M.

If an election is made by a vendor and a purchaser under the provisions of s 198 CAA 2001, then the parties to the transaction may jointly agree a figure at which the P&M is transferred which is binding both on the parties and HMRC. It is often not in a purchaserís interest to enter into an election at a figure stipulated by the vendor.

The existence of P&M allowances in a building may significantly increase its value.

The services offered by PTS are, in addition to those detailed under Property Taxation Services;
  • Pre-planning to maximise claims,
  • Planning, preparation and negotiation of claims with HMRC
  • Estimates of historic expenditure incurred and an audit service for vendors and purchasers as to the P&M content of a building.
  • We also advise as to whether various items of P&M are included on the Energy Technology Product List and suitable alternatives where a non-listed item has been specified.

Capital allowances is a complex field where specialised advice is essential, at PTS we deliver a cost effective and accurate service to our clients.

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