Capital allowances: a gift to small businesses

While many businesses claim capital allowances on items such as computers and cars, not many are aware of the huge tax savings that can be made in claiming on other ‘plant and machinery’ items that are embedded in their property.

Most commentators agree that over 90% of commercial properties in the UK have untapped capital allowances within them that could create huge savings for small to medium sized enterprises (SMEs) in tax relief, often over 30% of the purchase price of the building.

‘Machinery’ as a claimable category is rather self-explanatory and items falling into it are often easily defined. ‘Plant’ items however are very different. In basic terms, plant items that can be claimed on are taken to be “apparatus used for carrying on a business”.

This can include items such as removable floor coverings, demountable partitioning, air conditioning systems and toilets and kitchens, but the complex web of rules and case law that is the capital allowances regime means that this definition is in no way exhaustive. In fact, the items falling into this category can be very varied and often unusual — allowances have in the past been claimed on items such as bowling alleys, , fish tanks, zoo cages and artwork. One person even tried to claim on a horse!

Capital allowance claims on existing plant and machinery purchased with a building can only be made once in a building’s lifetime. However, a proportion of capital expenditure incurred on maintenance, refurbishments, alterations, extensions and new installations can also be claimed back against your company’s taxable profits to reduce your tax bill.

This can extend to claiming back on the services paid for throughout the whole process. For example, the capital expenditure on the design, project management or cost control or for the specialist costs of installation of a specific item of plant or machinery can also be taken into account for capital allowances — it is not just the cost of the item itself which is eligible. To take full advantage of the generous rules, SMEs should be sure to keep detailed records, particularly for building works on these projects.

Whether your business owns a factory, office, shop, hotel or other commercial property, the chances are good that it will have a sizeable amount of tax relief hidden away in its fixtures. While the big accountancy and law firms are well aware of these capital allowances and may claim for their international clients on a regular basis, advisors to smaller businesses don’t have access to the same specialist expertise. This is a shame, as £50,000 or so claimed in tax relief through capital allowances can make a much bigger difference to the margins of an SME that it can for the likes of Tesco.

SMEs wishing to take advantage of this system should act fast. Changes to legislation mean that a time limit for making a claim has now effectively been phased in. Although you can still make a claim at any point after the capital expenditure on plants or machinery has been incurred (providing you still own the assets), you must now pool the expenditure and make an election before you sell. It is also possible that a time limit for claiming may be introduced in the future as HMRC have already considered this.

The outlay for identifying, recording and claiming these allowances can seem complex and daunting, but the tax relief available often makes it more than worth it — taking just one example, expenditure of £100,000 on a hotel can typically generate £35,000 worth of tax relief hidden away inside. With these kinds of bonuses on offer, capital allowances could just be the industry’s best kept secret.

This article was written by Jeanette Edmiston – Technical Team Manager