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by Abbas Gulamhusein
When a business buys an asset, the cost doesn't simply get deducted from profit in the year of purchase. Under accounting rules, the cost is capitalised and depreciated over the asset's useful life. Capital allowances are the tax equivalent. They're the rules that determine how much of the cost you can deduct for tax purposes and over what timescale. Understanding capital allowances matters because claiming them correctly can accelerate the tax relief you get, which is the same as getting cash back sooner.
What Qualifies as Plant and Machinery
Plant and machinery is defined broadly for capital allowances purposes. It includes manufacturing and production equipment, computers and office technology, vehicles (with some restrictions), factory fixtures, and industrial machinery. It doesn't include land itself, and buildings have separate rules. The question HMRC applies is whether the asset is plant that's used in the business, not part of the building or the business premises itself.
This distinction matters. A specialist extraction fan in a factory qualifies as plant. The factory walls don't. A fitted kitchen in an office building doesn't qualify. The computer equipment in that office does. If you're buying furniture, vehicles, tools, or specialist equipment, it almost certainly qualifies. If you're not sure, ask your accountant before you claim it.
Full Expensing: The Current Relief
From April 2023, companies can claim 100% first-year allowance on qualifying plant and machinery. This is full expensing. You buy a £500,000 CNC machine, and you can deduct the full £500,000 in the year of purchase. You buy vehicles for £80,000, and you can deduct all of it immediately. You don't spread the relief over several years. You don't depreciate it gradually. You claim it in full in year one.
In terms of cash impact, a £500,000 plant purchase at full expensing saves £125,000 in corporation tax immediately, assuming a 25% tax rate. That's a 25% reduction in the effective cost of the purchase. If you were going to buy the equipment anyway, the tax saving is like getting a discount from the government.
This was previously temporary relief, but full expensing is now permanent policy for corporation tax purposes. Take advantage of it while it's available.
The Annual Investment Allowance
Not all businesses can use full expensing. Sole traders and partnerships can't. If you operate as a sole trader or partnership, you can claim the Annual Investment Allowance instead. This allows 100% relief on up to £1,000,000 of qualifying expenditure per year. Once you exceed £1,000,000 in a single year, anything above that goes into the standard allowance pools.
The AIA is generous. Most sole traders and partnerships will never hit the £1,000,000 cap, so they can claim 100% on all qualifying plant and machinery purchases in the year they're made.
Writing Down Allowances for Other Assets
Assets that don't qualify for full expensing or the annual investment allowance are placed in a pool and depreciated gradually using writing down allowances. The main pool is written down at 18% per year. The special rate pool, which includes integral features of buildings like heating systems, air conditioning, or lighting, and certain long-life assets, is written down at 6% per year.
This is much slower relief. If you buy a £100,000 asset going into the main pool at 18%, year one gives you an £18,000 deduction. Year two gives you about £14,760. It takes many years to fully recover the cost. That's why full expensing and the AIA are so valuable where they apply.
Cars: A Special Case
Cars get special treatment, and it's important to understand it because it directly affects the value of any car your company buys. Cars are not eligible for full expensing or the AIA. They go into the WDA pools at 18% per year (for cars with CO2 emissions up to 50g/km) or 6% per year (for cars with emissions above 50g/km).
There's one exception. Electric vehicles with zero emissions qualify for 100% first-year allowance. This is why tax-efficient companies buying vehicles for directors often choose electric cars. The tax relief is available immediately rather than spread over many years.
Getting the Claim Right
Claiming capital allowances correctly means keeping proper records of what's been purchased, when it was purchased, and at what cost. If the asset is partly private and partly business use, you need to apportion the cost. A company car that's used partly for personal journeys still gets capital allowance relief, but the claim should reflect the business use only.
Many companies leave money on the table because the accountant isn't given full information about what's been purchased. Make a note of major purchases during the year. Tell your accountant about them before the year end. Equipment that was bought in December needs to be captured and claimed in the current year's accounts, not missed and claimed late.
The timing of a purchase matters. If you're planning significant equipment expenditure and the year end is approaching, bringing the purchase forward into the current year means the relief is claimed this year rather than next year. That's cash back sooner.
Planning with Capital Allowances
Over several years, the difference between claiming capital allowances properly and missing them is substantial. A company buying £150,000 of plant and machinery per year claiming full expensing gets a tax saving of £37,500 per year at 25%. Spread that over five years, and you're saving £187,500 in corporation tax. That's money that stays in the business and can be reinvested or distributed as dividend to shareholders.
Your accountant will handle the technical side of claiming them correctly in the tax return. Your job is to make sure they know what's been purchased. Have a conversation with them about capital spending plans before the year end. If you're thinking about buying equipment, ask what the capital allowances treatment will be before you commit to the purchase.
If you'd like to talk through capital allowances for your business and make sure you're claiming everything you're entitled to, get in touch with us at Saymur.