Capital allowances are the tax relief granted for some capital expenditure done on business properties.

In the United Kingdom, a corporation may claim capital allowance based on assets acquired during the tax period that retains for use in the company.

The capital allowance, however, does not extend to all asset forms. In terms of measuring taxable income, capital allowances are the way HMRC makes tax equal and fair.

To qualify and be claimed under capital allowance with HMRC, there are specific categories that the assets should fall in.

Assets most often claimed under the capital allowance include the following:

  • Equipment such as hardware or other devices that are needed for the businesses to run
  • Machinery, such as dishwashers, fridges, machinery for plants, etc.
  • Vehicles (cars, trucks, buses) if used for usage in business.

There are no capital allowances for land and buildings, although some fixed plants and machinery inside a building may qualify for the same.

In general, capital allowances do not provide tax relief in full when the expense incurred. Alternatively, relief is distributed over the years, using different allowance forms, granted at varying rates.

The two main types of HMRC capital allowances are:

  1. Annual Investment Allowance (AIA)

The Annual Investment Allowance allows you to receive 100 per cent relief up to the annual limit of £ 200,000 against the cost of buying qualified plants and machinery.

TAn individual can claim the tax deduction the same taxable year in which the item is purchased. Every P&M claims under AIA except for vehicles and any products bought for the use in a company.

  • First-year allowance (FYA)

It is also known as “enhanced capital allowance.” First-Year Allowances (FYA) allow you to claim the full 100 per cent of the cost of qualifying assets in the same accounting period. It is quite similar to the Annual Investment Allowance.

First-year allowances offer new businesses the ability to cover their expenses that can add up instantly in the first year.

FYA refers to particular expenditure types, such as:

  • New plants and machines for use within certain business zones in specified areas
  • Specific new equipment for energy saving and water conservation
  • New cars with emissions of 75gms of carbon dioxide per km or less
  • Unique modern gas refuelling equipment for automobiles