Capital allowances are an important method of tax relief both for the farming business, where expenditure on plant, equipment, machinery and properties can be significant, and for rental properties that are operated as furnished holiday lets.
Neither expenditure that is capital in nature nor depreciation on capital expenditure are allowable as a revenue deduction when calculating the taxable profits of a business. Relief for qualifying expenditure is obtained by claiming capital allowances instead.
Claiming capital allowances will reduce the taxable profits of the business. This may result in a loss being incurred for which relief may then be obtained. The capital allowances claim may also reduce the taxable trading profits of the farming business to a level at which an averaging claim may be available. This could have tax benefits, such as moving trading farming profits from a year in which a higher rate of tax would be payable to a year in which a lower rate of tax is payable, or short term cash flow benefits such as reducing tax payments on account. Where a loss is incurred, the taxable profits of the business are treated as nil for the purposes of the averaging claim and the loss relief is applied separately, in the most beneficial manner. Averaging and loss relief claims are made on an individual by individual basis.
Making the distinction between what constitutes revenue expenditure and what should be treated as capital expenditure can be challenging, particularly where the expenditure relates to work carried out to properties or farm buildings, and should be determined based on the facts of each case and the application of factors such as statutory treatment, case law, the enduring benefit to the business, any element of improvement and whether the expenditure represents the replacement or acquisition of an asset in its entirety. Having identified that the expenditure is of a capital nature, further scrutiny will then be required in order to identify whether it qualifies for capital allowances and at what rate.
The annual investment allowance allows a business to claim 100% tax relief on qualifying expenditure up to a maximum annual expenditure limit. The annual limit has varied over the years and was most recently reduced from £500,000 to £200,000 from 1st January 2016. Where the business accounting period straddles a change in limit, transitional rules are applied to calculate the total limit applicable to the accounting period and the maximum amount that can be applied to expenditure incurred before/after the change in limit. The annual investment allowance must be claimed in the accounting period to which the expenditure relates. It is not available to mixed partnerships (where there is a corporate partner), on cars or on assets already owned and subsequently introduced to the business. Where the asset concerned is not used solely for business purposes, the annual investment allowance claim is restricted to the proportion relating to business use.
Where relief is not claimed via the annual investment allowance, writing down allowances may be claimed on qualifying expenditure at the appropriate rate, currently 18% or 8% per annum depending on the type of expenditure. The most common types of expenditure are plant and machinery (such as equipment and vehicles) and integral features (electrical systems, cold water systems, heating and ventilation systems, lifts and moving walkways, external solar shading). Expenditure on certain types of energy and water efficient equipment may qualify for 100% enhanced first year allowances subject to meeting specific criteria. Again, where the asset concerned is not used solely for business purposes, the capital allowances claim is restricted to the proportion relating to business use.
A significant balancing tax charge may arise when an asset on which allowances have previously been claimed is subsequently disposed of and careful consideration should therefore be given to the timing of any disposal.
This article provides a brief outline of the tax relief that may be available via capital allowances. Detailed consideration should be given to the specific circumstances of a business when assessing capital allowances claims and any other allowances or tax reliefs that may be available.
Lynn Miller CTA ACA MAAT | lynn.miller@renniewelch.co.uk
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