How to claim cash back with capital allowances

12th Jan 2021
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Have you made significant alterations to your premises to keep staff and customers safe? Perhaps you have invested in a new building that required adjustments to suit your needs.     

The coronavirus pandemic has forced many businesses to change the way they operate and this may require altering their physical environment.

Where the expenditure on the building amounts to repair, the cost can be claimed in full against the business income for the period it is incurred. A repair restores what was originally there without adding new functionality.

If the changes made to business premises added features, for example new screens or ventilation systems, those additions are classified as improvements to the property, and the cost needs to be claimed as a capital allowance. Our case studies show that capital allowances are often overlooked when purchasing or refurbishing commercial buildings.

There are several ways to claim capital allowances for expenditure on the structure or contents of a commercial building.

Plant or machinery

First check whether the cost relates to an item which has not become part of the building and is used for the business. These items are classified as “plant or machinery”, and qualify for capital allowances.

The cost of plant and machinery can be claimed as part of the annual investment allowance (AIA), which has an annual limit of £1 million for expenditure incurred in the calendar years: 2019 to 2021. The AIA gives the business a 100% deduction for the cost in the year it is incurred.

If the total amount spent on plant or machinery in the year exceeds the AIA cap, tax relief can be claimed as a writing down allowance of 18% per year. 

Expert guidance may be needed to determine which costs relate to additions to the building in which the business is conducted, and which items perform a function for the business as “plant”. Some items are designated as plant by law when they would not otherwise fall into that category, for example: heating & electrical systems and health & safety equipment. 

Integral features

Where the expenditure relates to items which are fixed to the building these could qualify as “integral features”, if it falls into one of these five categories:     

  • Electrical and lighting systems
  • Cold water systems
  • Space or water heating systems, powered ventilation systems, air cooling or air purification and any floor or ceiling comprised in these systems.
  • Lifts, escalators and moving walkways
  • External solar shading.

If the total amount spent on integral features in the year exceeds the AIA cap, capital allowances can be claimed for the cost of integral features at the rate of 6% per year for expenditure on and after 1 April 2019 (6 April for unincorporated businesses), and 8% per year for costs incurred in the period April 2012 to March 2019.

Other costs

Where the expenditure on the commercial building was incurred under a contract entered into on or after 29 October 2018 and it doesn’t fall into either the “plant” category or “integral features”, it should qualify for the structures and buildings allowance. This gives a deduction from income of 3% of the costs per year or 2% per year for expenditure incurred in the period from 29 October 2018 to 31 March 2020 (5 April for unincorporated businesses).

To maximise the capital allowances for the business every item of expenditure relating to the building should be carefully considered to determine whether it qualifies as “plant”, as an “integral feature”, or if it should be categorised as an addition to the structure.

We can support accountants with completing capital allowance claims for their clients to help relieve the financial strain, as this can generate a substantial tax saving and/or welcomed cash injection for the business.