Capital allowances
Whilst depreciation is applicable for UK accounting purposes, at present there is no ability to depreciate assets for tax purposes (tax depreciation). Instead the UK tax regime provides some relief on investment in capital assets utilising capital allowances.
Capital allowances are governed by a distinct piece of tax legislation in the UK; The Capital Allowances Act 2001 (CAA2001). However for transactions falling into accounting periods predating 5th April 2001, for income tax purposes or 1st April 2001 for corporate tax purposes, the predecessor act, The Capital Allowances Act 1990 (CAA1990), would generally be applicable.
Capital allowances are the means by which UK taxpayers obtain tax relief, against their taxable profits or income, for their capital expenditure on certain fixed assets. There are numerous different forms and rates of allowances available within the CAA2001 and to further complicate matters the rules are often subject to change via the annual Budget statements or subsequent Finance Acts.
The Budget 2009 announced the future intention to remove capital allowances from Furnished Holiday Lettings (FHLs) - although as a short reprive, these are currently extended from UK only to ALL PROPERTY WITHIN EURPOEAN ECONOMIC AREA (EEA).
In 2007 and 2008 Finance Acts brought into effect a number of reforms to the capital allowances code, particularly the phased abolition of Industrial Building Allowances (including Hotels) and Agricultural Buildings Allowances by 2011* and the new Integral Features category at 10% wrtining down allowance. Ove the last three years, the rules have become much more complex and now property expenditure is considerably more stratified, making it more difficult fragmented Early advice will enable you to properly assess the impact of these changes to you project and business.
Furthermore, the HM Revenue & Customs change their interpretation of the legislation as practice changes or through the impact of decided cases arising from the General or Special Commissioners or through the UK courts.
By optimising your capital allowances you can achieve significant tax savings against the appropriate income or corporation tax liabilities that you or your business may face.
The principal forms of allowances are:
- Plant and machinery allowances.
- Integral feature allowances
- Enhanced capital allowances (energy efficient plant).
- Long Life Asset allowances (plant with economic life >25 years).
- Short Life Asset allowances (plant with economic life <4 years).
- Industrial Building Allowances*.
- Hotel Allowances*.
- Enterprise Zone Allowances*.
- Agricultural Building Allowances*.
- Mineral Extraction Allowances.
- Research & Development Allowances.
- Know How Allowances.
- Patent Allowances.
- Dredging Allowances.
Additionally from April 2008 a new Annual Investment Allowance (AIA) provides 100% relief for up to £50,000 for all businesses. This AIA replaces the First Year Allowances available to Small and Medium Sized Enterprises (SMEs).
The most common of all the above allowances are the plant and machinery and integral feature allowances, which are typically available, to varying degrees, within all commercial properties.
Capital allowances relief should be properly considered as an integral part of any property transaction. This encompasses new build, alteration and refurbishment works as well as acquisitions and disposals of existing or “second hand” property. More that one form of allowances may be applicable to any given project and so selecting the most tax efficient form of allowances for your project may require a combination of the various available allowances.
Using our expertise, gained over our team’s many years of practicing in this specialist field, together with our regular contact with the HM Revenue & Customs, District Valuers and Regional Building Surveyors, E³ Consulting can truly optimise your capital allowances position whatever the project.
Already claim your allowances?
Whilst there are many accountants, surveyors and tax advisers who are well conversant with the capital allowances regime, in our experience, few have detailed knowledge of both the tax legislation and the property and construction issues essential in optimising any claims for these valuable allowances. Consequently we are able to enhance the available tax savings in over 80% of cases reviewed.
However, as you may expect, our specialists also work closely in collaboration with a number of independent accountancy, surveying and law practices to provide expert input into the due diligence for capital allowances advice and in preparing or negotiating tax savings for clients’ whether owner-occupiers, small independent businesses or major property investors.
Worldwide Services
Our services are also applicable to property transactions elsewhere in the World and our team has experience of reviewing or preparing capital allowances or tax depreciation claims on projects in Ireland, France, Holland, Italy, Singapore, South Africa and USA.
For Commonwealth countries, e.g. South Africa, Australia, India, Malaysia generally these have relatively similar tax legislation to the UK and their own capital allowances regimes are broadly comparable to that in place in the UK.
United States of America operates a system of tax depreciation, following more closely the accounting treatment. Cost Segregation studies facilitate optimised segregation of asset costs into the most appropriate and tax efficient categories of real property, land improvement or personal property thus achieving accelerated tax depreciation.
Europe’s tax legislation, varies by individual national jurisdictions, but again each is broadly similar the USA model where tax and accounting treatments are more aligned and relief is typically available in the form of tax depreciation. Frequently property costs are all lumped into a “land and buildings” category and depreciated over the applicable 20-50 year period. However it is possible to re-categorise some of this expenditure into the relevant plant and equipment classifications, thus accelerating the tax depreciation achievable.