What’s the difference between capital allowances and Annual Investment Allowance?

What are capital allowances?

Capital allowances let you claim tax relief when you buy assets to keep in your business. They’re a different type of spending to the kind you do on day-to-day running costs.

What if I operate as a sole trader or in a partnership?

If your income is less than £150,000 a year and you’re a sole trader or a partner, you may be able to use the cash basis system instead. Cash basis accounting means you only have to declare money when it comes into or out of your business.

You don’t pay income tax on money you didn’t receive in your accounting period.

What can I claim capital allowances for?

According to gov.uk, you can claim for plant and machinery, which includes:

• items that you buy, which stay in your business, including cars
• demolition costs for your plant and machinery
• ‘integral features’ of a building (more on this below)
• some fixtures, including fitted kitchens, bathroom suites, fire alarm and CCTV systems
• alterations to a building to install plant and machinery (but not repairs)

What counts as an ‘integral feature’?

• lifts, escalators and moving walkways
• space and water heating systems
• air-conditioning and air cooling systems
• hot and cold water systems (but not toilet and kitchen facilities)
• electrical systems, including lighting systems
• external solar shading

Other capital allowances you can claim

• renovating business premises in disadvantaged areas of the UK
• extracting minerals
• research and development
• ‘know-how’ (intellectual property about industrial techniques)
• patents
• dredging

When you claim capital allowances, it doesn’t matter whether you own or rent the building. However, you can only claim for items you bought.

If you buy your premises from a previous business owner, you can only claim for things they claimed for. So it’s important to agree the value of the fixtures and integral features during the sale process. This also allows the seller to account correctly for them.

You can also claim ‘enhanced capital allowances’ for certain energy and water efficient equipment, such as zero-emission goods vehicles and some cars with low CO2 emissions.

How do I work out the value of the thing I want to claim for?

This will usually be the amount you paid for the item. If you owned it before you started using it in your business, or if it was a gift, you should use the market value.

What can’t I claim capital allowances for?

Buildings and land structures don’t qualify as capital allowances. These include doors, gates, shutters, mains water and gas systems, bridges, roads, and docks.

You can’t claim capital allowances for things you lease, either, or for things you only use for business entertainment. Gov.uk gives the examples of a yacht or a karaoke machine.

Do purchases for residential lettings businesses qualify?

You’ll only be able to claim for things if your business qualifies as a furnished holiday lettings business, or if the thing you want to claim for is in a common area of a residential building. This might include a table in the hallway of a block of flats.

Also, see gov.uk for the special rules on capital allowances if you run a care business.

How does the Annual Investment Allowance (AIA) work?

You can claim AIA on most plant and machinery. This means you can deduct the full cost of the item from your profits before you work out your tax.

A new AIA allowance kicks in each time you enter a new accounting period, and if you spend more than the AIA amount, you can claim writing down allowances on that extra spending.

Claiming for cars, things you owned for a different reason before you started using them in your business, or things that were given to you or your business, needs to be done via writing down allowances instead of AIA.

It’s worth noting that the AIA amount has changed a lot since 2008, so it’s a good idea to keep up to date with the latest AIA rates on gov.uk.

How do I claim for AIA and capital allowances?

You claim for them on your tax return. Read our article to find out more about how to fill in your Self Assessment tax return or, if you’re a limited company, how to file your company tax return.

How do I claim for other business costs?

Other things which you wouldn’t be able to claim as capital allowances include day-to-day running costs, things you buy and sell as part of your business, and interest payments or financing costs related to buying business assets.

Read our article to find out what you can claim as tax-deductible expenses.