Last reviewed 17 November 2023
The cost of capital assets is not deductible against tax. The normal deduction permitted is for revenue costs, such as the costs of running an office or factory and the costs of goods and materials bought for resale. There are, however, many allowances for capital assets that can be claimed to reduce tax costs. These allowances include super-deductions, special rate first Year allowances, the 100% first year allowance and the 100% annual investment allowance. In addition, where these deductions are not available, tax costs can be reduced using writing down allowances.
100% first year allowances
Where an asset qualifies for the 100% first year allowance, the full cost can be deducted from profits. The 100% first year allowance can be claimed in addition to the annual investment allowance.
This allowance is claimable on new, unused:
cars with zero CO2 emissions
plant and machinery for gas refuelling stations
gas, biogas and hydrogen refuelling equipment
zero-emission goods vehicles
equipment for electric vehicle charging points
plant and machinery for use in a free port site.
The 100% first year allowance can be claimed by companies, partnerships and sole proprietors, except the allowance for free port plant and machinery which can only be claimed by companies. This allowance cannot be claimed where the items are bought to lease to others or for use in a home that is let out.
Super-deductions and special rate first year allowances
Super-deductions and special rate first year allowances are the allowances that can be claimed on the cost of qualifying plant and machinery by companies. These allowances can be claimed on expenditure on or after 1 April 2021 but before 1 April 2023. The purchase must not have been made due to a contract entered into before 3 March 2021. Consequently, the final year that a claim can be made is for the period ending in April 2023.
The super-deduction allows a deduction of up to 130% of the cost from the business’s profits before tax.
The rate of the special rate first year allowance is 50%. Special rate plant and machinery do not qualify for the super-deduction, but may be eligible for the 100% annual investment allowance.
Only certain plant and machinery qualifies for these allowances or deductions. The plant and machinery must be:
new and unused.
The plant and machinery must not be:
given to the business
a car (though other vehicles may qualify for the super-deduction)
bought to lease to somebody else (other than background plant in a building)
purchased in the accounting period that the business ceases.
The super-deduction can only be claimed for main rate plant and machinery. This is plant and machinery that is not special rate. Main rate plant and machinery includes, but is not limited to:
machines such as computers, printers, lathes and similar items
vehicles other than cars
some fixtures and fittings such as fire alarm systems.
The special rate first year allowance can be claimed on special rate plant and machinery. This includes, but is not limited to:
thermal insulation added to existing buildings
assets with a useful life of at least 25 years.
Integral features include items such as lifts, escalators, heating systems, air conditioning systems, hot and cold-water systems, electrical systems and external solar shading.
A super-deduction cannot be claimed for plant and machinery in ring-fenced trades. Ring-fenced trades are companies involved in the exploration and production of oil and gas.
HMRC provides further guidance on whether you can claim the super-deduction of the special rate first year allowance at GOV.UK.
Sole proprietors and partnerships
Sole proprietors and partnerships cannot claim the super-deduction or the special rate first year allowance. These businesses can claim the annual investment allowance, the 100% first year allowance and writing down allowances.
Annual investment allowance
The annual investment allowance is £1 million. This allowance can be claimed by sole proprietors, partnerships and companies on plant and machinery. It cannot be claimed on business cars, items owned for other reasons before being used in the business or items given to the business. Writing down allowances may be claimable instead on these items. Writing down allowances can also be claimed on amounts in excess of £1 million.
Any claim for the 100% investment allowance as well as writing down allowances are to be claimed on the business’s tax return.
Writing down allowances
The writing down allowance can be claimed where the assets do not qualify for the annual investment allowance or the £1 million allowance has been utilised. The writing down allowance allows a deduction of a certain percentage of the value of assets from the profits of each year.
The amount of the allowance that is permitted depends on the asset. Business cars writing down allowances depend upon the car’s emissions. For other assets, they are to be grouped into pools depending upon the rate they qualify for. The amount of the claim must be calculated separately for each pool. There are three types of pools.
The main pool with a rate of 18%.
A special rate pool with a rate of 6%
Single asset pools with rates of 18% or 6% depending on the asset.
All items go into the 18% pool unless they go into the special rate pool or the single asset pool.
The 6% tax relief can be claimed on:
parts of a building considered integral
items with a long life
thermal insulation added to a building
cars with CO2 emissions over a certain threshold.
Items with a long life are those with a useful life of at least 25 years. Where the value of the long-life assets exceeds £100,000 the cost of the assets is put into a special rate pool. If the value is £100,000 or less the costs are to be put into the main pool.
Items are put into single asset pools where they are short life assets or they are used outside the business (if the business is a sole trader or partnership).
When assets on which an allowance or deduction has been claimed are sold, it may be necessary to pay tax on the sale proceeds. In general, tax is payable where the sale proceeds exceed the written down cost. Thus, if the original cost was £10,000 and £2000 has been claimed in writing down allowance, tax will be due if the sale proceeds exceed £8000 (£10,000 - £2000 = £8000).
HMRC has a guide to working out what you can claim for capital allowances. This can be found at GOV.UK.
Tax can be reduced significantly by claiming the correct allowances and deductions. It can sometimes be complex to make the claim, but most claims are simple and are claimed through the tax return. When the business is uncertain of what can be claimed, professional advice should be sought.