Capital Allowances Insights

Capital allowances are a type of UK tax relief for ‘capital’ expenditure on business assets. By investing in assets like WCs, carpets, fire alarms, data cabling, water systems, and lighting you can enjoy tax relief on your hard-earned cash.

But remember, not all assets are created equal, and the value of your capital allowances will depend on the type of asset and the nature of your business. In addition, these allowances are only eligible for business assets, not personal ones.

On the 29th October 2018, the Government announced The new Structures and Buildings Allowances (SBA) regime. Stating the new clauses will be inserted into the Capital Allowances Act 2001 at section 270.

This new allowance provides tax relief against the cost of building structural make up, not the plant and machinery but the roof, ceiling, walls and floors etc.  However, it is only given a flat rate of 3% as opposed to up to 100% for plant and machinery.

Updating and refurbishing premises can be capital intensive. And if that capital is expensive or little capital is available to you, you may seek to recoup some of this from the tenant. However, depending on the type of update, you want may do that via a service charge or alternatively through a dilapidations notice.

Depending on what route you choose to refurbish and update your property, there will be different tax implications and reliefs available to you. This article gives a brief insight into the tax implications available under the options.

The repair and renewal of fixtures within a commercial property used to be a relatively simple matter for tax purposes. Taxpayers could claim a 100% deduction from taxable income for qualifying repairs, like-for-like replacements or replacement of obsolete assets with the nearest modern equivalent.

However, The Finance Act 2008 introduced the concept of “integral features,” which meant that the tax treatment of plant and machinery deemed to be an integral part of the building was altered. From 1 April 2008, expenditure incurred on the replacement of an integral feature, could no longer be treated as a revenue expenditure deductible for taxable profits. Instead expenditure now had to be capitalised even if it could otherwise be treated as a repair to the building concerned.

Following the 2021 Budget’s generous first year allowance for Main Pool Plant at 130% and also a 50% First Year Allowances for Special Rate Plant, the Government has announced an amendment that ensures property lessors are not prohibited by the general exclusion to claiming the relief when leasing plant and machinery (P&M).

The Long Funding Lease change, brought in by the Finance Act 2006 (FA06) was to correct a long-standing distortion in the tax system which meant that those who acquired assets under certain kinds of leases were treated differently from those who financed their acquisitions with debt.

Before FA06, this meant that it was the lessor and not the lessee that could satisfy the ownership condition and claim plant and machinery allowances (PMA), despite the lessee being responsible for the repair and maintenance. This contrasted with the tax treatment where a person borrows money and uses it to buy an asset rather than leasing it and in those circumstances, that person is the owner of the asset and can claim PMA.

Unfortunately, there is no simple test for, any statutory definition of or guide to what is determined as capital or revenue expenditure, and this is acknowledged in HMRC’s Capital v Revenue Toolkit.

Guidance initially comes from legislation and then from the case law that has evolved around the definition of capital and revenue expenditure. In addition, the accountancy treatment may be of assistance in the determination but the tax treatment is always a question of law determined by the facts of each individual case.