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What are Embedded Capital Allowances

What are Embedded Capital Allowances?

When you buy long-term assets for your business such as property you cannot claim the expenditure for your Profit and Loss Account. However based on the expenditure you may be able to claim Capital Allowances in accordance with The Capital Allowances Act 2001.

Capital Allowances provide tax relief to deduct the cost of certain assets from taxable profits. This relief is generated by claims following capital expenditure on commercial property.

  • Purchase of an old or newly built property
  • Construction of a new property
  • Building alterations, extensions and refurbishments to a property
  • The fit out of let property

Capital Allowances are available for all individuals and businesses that are UK taxpayers. The relief can be as much as 40% of the cost of a property and higher for alterations, extensions and refurbishment and, if you bought or undertook that expenditure in the last two years may well be all immediately available.

The Capital Allowance Act 2001

The Capital Allowances Act 2001 is an Act of the Parliament of the United Kingdom that governs how capital allowances are deducted from income taxable under the Income Tax Act 2007 and the Corporation Tax Act 2009.

Capital allowances are a form of corporation tax or income tax relief for some, but not all, capital expenditure. A business will reduce, or write down, the value of many of its capital assets in its accounts year by year using a process known as depreciation or amortisation.

Through an amended personal or corporation tax return, we can replace depreciation with capital allowances, which can be used to reduce taxable profits as well as produce a tax rebate.

Tax relief is not generally given in full at the time the expenditure is incurred, but instead is spread over a number of years. Different types of expenditure attract allowances at different rates. This is because capital allowances, broadly speaking, take the place of depreciation charged in the commercial accounts.

Allowances are available for expenditure on:

  • Plant and machinery
  • Industrial buildings
  • Agricultural buildings
  • Research and development
  • Mineral extraction
  • Know-how

Capital allowances give taxpayers relief for certain kinds of expenditure. The Act deals with who gets relief for what expenditure, when and how.

Not all assets qualify for allowances; for instance, expenditure on land does not generally qualify. The most common type of allowance is that on plant and machinery.

Capital allowances are optional but must be specifically claimed. The nuances of the act require experts in identifying and valuing these items. This is why HMA Tax works with thousands of commercial property owners each year in claiming embedded capital allowances.