Introduction

As a business you can claim tax allowances, called capital allowances, on certain purchases or investments. This means you can deduct a proportion of these costs from your taxable profits and reduce your tax bill. Capital allowances are available on plant and machinery, buildings - including converting space above commercial premises to flats for renting - and research and development. The amount of the allowance depends on what you're claiming for. In some cases, the rates are different in the year you make the purchase and subsequent years. This guide will tell you what purchases or investments qualify for a capital allowance, how much you can claim and the simplest way to make your claim.

Capital allowance on plant and machinery

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.
How much you can claim?
If you're buying equipment, 25 per cent is the standard allowance for businesses each year. Small and medium-sized businesses can generally claim 40 per cent of the expenditure in the first year. Small businesses are eligible for a first-year allowance of 50 per cent for expenditure incurred in the years ending:
- 31 March 2005 and 31 March 2007 - if subject to corporation tax
- 5 April 2005 and 5 April 2007 - if subject to income tax
In some cases you can claim 100 per cent in the year you make the purchase.

Capital allowance on buildings

You can claim capital allowances on the cost of:
- constructing industrial or agricultural buildings, commercial buildings in enterprise zones, and certain types of hotel
- buying or constructing a building to use for a qualifying trade such as manufacturing or processing
- renovating or converting space above shops and other commercial premises to provide flats for rent - for example, money spent on building dividing walls or fitting a new kitchen
You cannot claim capital allowances on the cost of:
- houses, showrooms, offices and shops
- the land itself, such as buying the freehold of a property or acquiring a lease
- extensions, unless it provides access to qualifying flats
- developing adjacent land
- furnishing qualifying flats
How much you can claim The allowance for buying industrial and agricultural buildings is 4 per cent, in both the first and subsequent years. You can usually claim 100 per cent of the cost of converting underused or vacant space above commercial property into flats. You can claim 100 per cent of the construction cost of commercial and industrial buildings, including offices, in enterprise zones. If you buy a used building in an enterprise zone within two years of its first use, you can claim 100 per cent of the cost or 25 per cent a year of the cost.

Research and development capital allowances

You can claim capital allowances on certain types of research and development (R&D). As a general rule, an activity qualifies as research and development if:
- it involves innovation and creativity in science and technology
- the research is relevant to your business
- you are classed as a trader and not working in a profession or vocation
How much you can claim?
Small and medium-sized companies can claim enhanced relief of 100 per cent on research and development. This means you can deduct £100 from your profit and loss account for every £100 you spend on qualifying research. Extra relief is also available for certain revenue expenditure.

Work out your capital allowance claim

When you claim a first-year allowance, the remaining amount is carried over to the following year. For example:
Machinery £8,000
First-year allowance claimed at 40 per cent (50 per cent if you are a small business) £3,200
Balance carried forward to next year - known as Written Down Value (WDV) £4,800
You then add the balance - the WDV - to the total WDV of other expenditure (this excludes cars) after the allowance is calculated for the first year. Therefore, if the WDV of other expenditure is £14,000, there is a total of £18,800 (4,800 + 14,000) on which you can calculate the capital allowances in the following year.

Claiming for subsequent years
Capital allowances on plant, machinery and research are calculated on a reducing balance basis:
- You can claim a 40, 50 or 100 per cent allowance in the year you make your purchase, depending on what it is and what size business you have. The balance is added to the value of other expenditure in the "pool", after capital allowances have been calculated
- the following year you can claim 25 per cent of the reduced balance - the WDV - of the pool, and the same again in following years.
Capital allowances on buildings are calculated on a straight-line basis. This means you can claim 4 per cent of the initial investment every year. For example, if you spend £100,000 on constructing an industrial property, you can claim £4,000 a year.
Balancing charges
If you sell an item, give it away or stop using it in your business, you may need to add a balancing charge onto your profit before you calculate your tax.

Claiming capital allowances

Use your income or corporation tax return to claim for capital allowances. When making the claim:
- You must make a separate claim for each accounting period of your business. If this is longer than 18 months, you'll need to split it into shorter periods and make separate claims for each. The first 12 months is one period, and each subsequent 12 months, or less than 12 months, is another period.
- You can make a capital allowance claim any time up to the normal time limit for making or amending your tax return (income tax) or 12 months after the filing date for your Company Tax Return. This will be extended if there is an enquiry into the return.
- There is no obligation to claim for the full amount of an allowance. If you claim only part, eg 10 per cent instead of the 25 per cent you are entitled to, then the pool balance carried forward will be higher so claims for later years will be higher.
- If your business is a partnership, you need to claim your capital allowances collectively, not as individual partners.
- If you're registered for VAT, you only claim capital allowances on the net cost of the asset. If you're not registered for VAT, you claim capital allowances on the total cost including VAT.

Special cases - capital allowance

You can claim capital allowances for assets you own and lease to other users. Some of these rules cover items you use privately as well as for business.
Expensive cars
For cars costing more than £12,000, you can claim a maximum of £3,000 a year per car. If the car has low CO2 emissions there is no restriction if you use the car partly for private use and partly for business use. However, only the business proportion of the allowance can be claimed. For example, you buy a car for £15,000 and drive it 12,000 miles, of which 8,000 miles is private use. Based on the cost of the car, you're eligible for the maximum allowance of £3,000, but as your mileage was only one-third for business, you can only claim £1,000, one third of the allowance. You should make a separate calculation for each car and not "pool" them with your other purchases.
Plant and machinery used only partly for business
You should make a separate calculation for plant and machinery and work out the capital allowance based on the proportion you use them for business. This includes cars costing less than £12,000.
Short-life assets
There are special rules if you intend to keep equipment for a short time or you think it will wear out quickly. If this is less than five years, you can choose to calculate the allowances separately from your pool.
Long-life assets
This is an asset you expect to use for more than 25 years. The allowance is 6 per cent and you should make a separate pool of these assets.
Assets leased out
You can claim for assets you own or lease to other users. You do this in the same way as for assets you use in your business, except the first-year allowance is not available.

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