What are capital allowances and how do you claim them?

Capital allowances are a widely under-claimed form of tax relief for businesses, allowing owners to offset the cost of certain assets against their taxable profits. Whether you’re buying a property, machinery or equipment, capital allowances can reduce the tax bill, which is always a welcome reduction!

In this article, we’ll explore what capital allowances are, break down the different types of capital allowances available and guide you through the process of making a claim so that you don’t make any common mistakes!

What are capital allowances?

Capital allowances are a type of tax relief that business owners can claim on certain types of qualifying capital expenditure, such as plant and machinery assets, integral features, equipment used for research and development, business vehicles and buildings and structures. These qualifying assets not only include items that they acquire for use in their businesses, but also, embedded fixtures that were already in the building when it was purchased!

Most businesses can take advantage of capital allowances, particularly small and medium-sized enterprises that invest in assets to support their operations. We work with a number of different businesses here at Eureka Capital Allowances, including Pub and Restaurant owners, FHL owners and Care Homes and Nurseries, helping our customers to save thousands of pounds in tax relief!

Capital allowances allow businesses to offset the cost of qualifying assets against their taxable profits, playing an important role in reducing the overall tax bill. This tax relief can provide significant financial benefits, enabling companies to retain more cash for reinvestment and growth. It’s important to note, however, that capital allowances can only be claimed for business assets that depreciate over time. This includes tangible fixed assets that are expected to lose value as they are used in the business.

Different types of capital allowances

There are four main types of capital allowances in the UK. Let’s explore the four different types so you can achieve a greater understanding of how they work and what they cover.

Annual Investment Allowance (AIA)

The Annual Investment Allowance (AIA) is a type of tax relief available to sole traders, partnerships and companies in the UK that allows them to deduct the full value of qualifying capital expenditures from their taxable profits, as long as they claim them in the year the expenditure occurs. This relief can be claimed by businesses when they are filing their annual tax returns.

A number of different assets can qualify for the AIA, including machinery, equipment and vehicles used for commercial purposes. It does not, however, cover buildings, structures or land.

As of April 2023, the limit for claiming Annual Investment Allowance is set at £1 million. For any qualifying assets that cost up to this limit, businesses can claim 100% of the cost. However, for assets costing over £1 million, you will still be able to claim AIA on the first £1 million of that expenditure.

First-Year Allowance (FYA)

First-Year Allowances are a type of capital allowance available to businesses that allow them to claim a tax deduction on specific types of assets, such as those that are beneficial for the environment or that enhance energy efficiency – such as low-emission vehicles, energy-saving appliances and expenditure on R&D assets.

Similarly to the Annual Investment Allowance, FYAs need to be claimed in the year the asset is purchased. Unlike the AIA though, FYAs usually allow businesses to claim 100% of the cost of the asset, regardless of its cost! FYAs can be claimed alongside the AIA, but if both allowances apply, businesses must decide how to allocate their claims.

Writing Down Allowance (WDA)

A Writing Down Allowance allows businesses to deduct the depreciation of qualifying assets over time, rather than claiming the full cost in the year the asset was purchased. This type of capital allowance enables businesses to account for the decline in value of their assets, reflecting their usage and wear and tear over time.

A number of different commercial assets qualify for the WDA, including machinery and equipment vehicles, fixtures and fittings, and any ‘long-life’ assets that have a life expectancy of over 25 years.

There are two different classification of assets that fall into the WDA bracket:

Main Pool: Assets that fall into the main pool classification include machinery, tools, fixtures and fittings, IT Equipment and office furniture. Main pool assets qualify for a WDA rate of 18% per year.
Special Pool: Special pool assets include long-life assets, integral features, certain energy-efficient equipment and certain commercial vehicles. Special pool assets qualify for an annual WDA rate of 6%.

The WDA rate is calculated on the remaining balance of the assets costs each year, after the previous allowances have been claimed. This means, for example, that a main pool asset purchased for £10,000 would have a WDA of £1,800 in the first year, but this would drop to £1,476 in the second year.

Structures and Buildings Allowance (SBA)

The final type of capital allowance is the Structures and Buildings Allowance. The SBA allows businesses to claim tax relief on any costs related to construction and renovation, including any construction costs, costs relating to converting existing buildings to new uses and even certain related expenses like architect or surveyor fees.

The SBA allows businesses to claim a 3% Writing Down Allowance on the qualifying expenditure each year. This means that businesses can deduct 3% of the remaining balance of the asset’s cost annually. In order to qualify for the SBA, the building or structure must be used for qualifying commercial activities, such as trade or rental purposes.

The allowance is available for both new constructions and significant renovations, and doesn’t have an upper claim limit, meaning it is incredibly beneficial for businesses investing heavily in new buildings or renovations.

How do I claim capital allowances?

Now you know what capital allowances are and the different types, you’re probably wondering how to go about claiming capital allowances! This section provides a step-by-step guide on how to claim capital allowances for your business.

Identify qualifying assets

Start the process by identifying the assets your business has purchased that qualify for capital allowances. Separate them into different categories, depending on whether you will claim ADA, FYA, WDA or SBA. Common qualifying assets include machinery, equipment, vehicles, and structures. If you’re claiming WDA, you’ll also need to differentiate whether your asset is main pool or special pool.

Calculate the allowances

Once you have identified the qualifying assets, calculate the allowances available. Depending on the type of asset and the applicable rate, determine the amount you can claim. This may involve calculating the AIA for the full cost of certain assets, or applying the relevant WDA rates for other qualifying expenditures.

Claim in your tax return

Claim capital allowances on your:

Company Tax Return if you’re a limited company – you must include a separate capital allowances calculation on your CT600 form.
Partnership tax return if you’re a partnership
Self Assessment tax return if you’re a sole trader

Make sure that you report the calculated allowances accurately so that you’re fully compliant with tax regulations.

Keep detailed records

Keep detailed records of all purchases related to the claimed assets, including invoices, receipts, and any documentation supporting your claims.

By following this step-by-step guide to claim your capital allowances, you can reduce your taxable profits. Keeping accurate records and understanding the various types of allowances will ensure you maximise your claims and remain compliant with tax regulations.

Common mistakes people make when claiming capital allowances

For people who don’t do it every day, claiming capital allowances can be quite tricky. Let’s explore some of the most common mistakes we see people make when trying to claim their capital allowances, to hopefully help you to avoid them:

Failing to claim within the correct time frame: Capital allowances – especially AYAs and FYAs – must be claimed within specific deadlines, and missing these windows can lead to lost opportunities for tax relief. For example, the FHL Tax Regime is being abolished in April 2025. You can still carry your allowances forward beyond this date and benefit from your tax savings, but only if you claim them before this deadline.
Having incomplete records: Incomplete records can easily lead to failed claims. Without detailed records, HM Revenue and Customs (HMRC) may reject claims or request further information, so it is essential that you keep any relevant invoices, receipts and other documentation.
Misidentifying qualifying assets: Many businesses incorrectly categorise their assets, assuming certain items qualify for capital allowances when they don’t. It’s important to have a clear understanding of the requirements for each type of allowance to ensure your claims are made accurately. More information can be found here.
Not using capital allowance specialists for complex claims: If you’re unsure about the claims process or have complex claims, it may be beneficial to speak to a capital allowances professional or an accountant. They can provide guidance tailored to your individual circumstances and help to ensure that all eligible claims are made correctly.

How Eureka Capital Allowances can help

At Eureka Capital allowances, we have decades of experience in capital allowances and helping our clients unlock thousands of pounds of hidden tax relief in their businesses. Our advisors are trained in helping our customers understand what capital allowances they are eligible for and effectively navigate the claims process.