Most day to day business expenses can be deducted from business income when calculating your taxable profits. However the rules are different for ‘capital’ expenditure.
‘Capital allowances’ is the term used to describe the allowances which allow businesses to secure tax relief for certain capital expenditure. Most ‘capital’ items, such as computer equipment, vehicles, machinery etc last for more than a year or so. The tax rules do not allow you to automatically deduct the full cost of such items in one go. And different rules apply to different types of capital expenditure. In some cases no tax relief is available at all even though you may have spent the money solely for business purposes.
This guide provides an overview of the main types of capital allowances that can be claimed and is aimed at businesses with relatively straight forward tax affairs.
Capital allowances are available in respect of:
- Most ‘plant and machinery’ used for business purposes;
- Certain building works - for example converting space above commercial premises to flats for renting;
- Certain research and development expenditure.
Your entitlement to claim capital allowances is usually unaffected by how you pay for the items in question. For example, if you buy an item on hire purchase you can claim capital allowances based on the full normal cost of the item. The interest you pay and other charges are not part of the capital cost of the item but can usually be counted as deductible business expenses.
If you simply rent capital equipment, and do not secure ownership of the items, no capital allowances can be claimed. Instead the payments due, under what is usually called an ‘operating lease’, are simply deductible as a normal business expense.