History of Capital Allowances

Up to late 19^th century (1878 to be precise) there were no capital allowances.

In 1878, a “wear and tear” allowance was introduced for traders in plant and machinery by allowing them to reduce their income by the allowance amount. For mills and factories, a “mills and factories” allowance was available. The quantum of the allowance was an amount considered “just and reasonable” and tended to represent the “economic” depreciation in the value of the equipment.

A new system of allowances was introduced in 1945 to replace the above allowances. The wear & tear allowance was replaced with:

• An initial allowance of 20% on plant & machinery for the first year
• Annual writing-down allowances to represent the usage of the asset over the years; the rate was fixed by Inland Revenue and was generally 25% for plant & machinery
• A balancing adjustment when the asset was retired or sold to ensure that the total relief was equal to the actual reduction in value over the period of ownership

The mill & factories allowance was replaced by:

• An initial allowance of 10% on new buildings
• Annual writing-down allowances at 2%
• A balancing adjustment when the asset was retired or sold to make total relief equal to actual reduction in value

The building allowance was confined to industrial buildings, and shops, offices and even hotels were excluded.

An investment allowance, over and above the allowances above, was introduced in 1954 to encourage investment in industrial assets including buildings.

The system was simplified in a major way in 1971 to eliminate burdensome record-keeping and computational requirements. A further simplification in 1984 saw the elimination of initial and first year allowances, among others.

There were other changes reintroducing and withdrawing different allowances in pursuit of specific policies until capital allowances were consolidated in 1990. There was a further revision and the current legislation is CAA2001.

Capital Allowance Related Posts

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