Capital allowances on plant and machinery

If you're in business you can claim tax allowances, also known as capital allowances, on certain purchases or investments that you make on business assets. You cannot directly deduct your expenditure on those assets when calculating your profits or losses, instead you can deduct a capital allowance. This applies whether you're self-employed and pay Income Tax or are a company or organisation that's liable for Corporation Tax.

Many common business assets such as office equipment, furniture and machines or tools, may be considered to be plant and machinery for capital allowance purposes, and expenditure on them might qualify for plant and machinery allowances.
This guide explains which types of assets might count as plant and machinery for capital allowance purposes, what capital allowances are available for them, and how to calculate and claim them.

This guide does not cover plant and machinery allowances relating to fixtures in buildings or structures, including certain integral features in buildings. For more information, see the guide 'Capital allowances relating to building and renovation'.

On this page:

Items that qualify for plant and machinery allowances

Tools, machinery, vehicles and other equipment you own (having bought them for your business) will generally qualify for plant and machinery allowances.

Some common examples include:

  • vans
  • cars
  • tools
  • furniture
  • computers
  • machinery
  • equipment

However, different assets may be eligible for different plant and machinery allowances. For more information, see the page in this guide on types of plant and machinery allowances.

There are also certain fixtures in buildings, and integral features in buildings, that qualify for plant and machinery allowances.

Capital allowances relating to buildings and renovation

Find out more about what qualifies as plant and machinery

Qualifying rules for plant and machinery allowances

To qualify for plant and machinery allowances, all the following must apply:

  • you must have incurred capital expenditure on the provision of plant and machinery that is used wholly or partly for the purposes of your business. You must own the asset in question as a result of incurring that expenditure
  • the asset must not be something you buy and sell by way of your trade, although you might eventually sell it for some other reason - you may then have to make an adjustment to your capital allowances. The asset must also not get used up in producing what you sell or supply by way of your trade
  • the asset must generally be expected to last for more than two years

In most cases, you cannot claim capital allowances for assets you lease from someone else. You may be able to claim certain capital allowances for assets that you own and lease out to other users as part of your business, but only in very particular circumstances.

If you partly use an asset for non-business use, for example, for private use - you can still claim capital allowances on the business use of the asset. The allowances you claim must be reduced by the amount arising out of your non-business use so that only the business use proportion is taken into account.

Plant and machinery allowances: long funding lease

Plant and machinery allowances on fixtures

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Types of plant and machinery allowances

There are a number of allowances available for expenditure on plant and machinery. The term 'accounting period' is used throughout this guide, but you will see the term 'chargeable period' used in the HM Revenue & Customs (HMRC) Capital Allowances Manual.

Annual investment allowance (AIA)

Most businesses can claim an AIA for expenditure on most plant and machinery, apart from cars. In many cases (depending on your level of expenditure) this may mean that you can claim your entire expenditure on qualifying items against this allowance. The annual amount of AIA from 1 April 2012 for Corporation Tax, and from 6 April 2012 for Income Tax is £25,000. A temporary increase of the annual amount of the AIA from £25,000 to £250,000, for two years, in relation to expenditure incurred on or after 1 January 2013 has been announced, subject to legislation.

AIA only applies for expenditure incurred on or after 1 April 2008 for Corporation Tax or 6 April 2008 for Income Tax. There is more information in this guide on AIAs.

First-year allowances - some of which are also known as 'enhanced capital allowances' or ECAs

Currently, there are 100 per cent first-year allowances available for expenditure on certain specific types of asset. This means you can claim the full expenditure on these assets as a deduction when calculating your taxable profit or loss for the accounting period when you spent the money, if all the conditions are met. The key types of assets that qualify for first-year allowances are:

  • new, unused cars with CO2 emissions of not more than 110 grams per kilometre driven
  • certain designated energy-efficient equipment
  • certain environmentally beneficial, currently water efficient, equipment
  • equipment for refueling vehicles with natural gas, biogas or hydrogen fuel
  • new zero-emission goods vehicles, such as electric vans

There is further information in the sections below on writing-down allowances and 'pools', and first-year allowance.

Writing-down allowances (WDA)

WDA are annual allowances that reduce, or 'write down' any balance of capital expenditure on plant and machinery that you haven't been able to claim either the annual investment allowance or a first-year allowance for, and on residual balances of expenditure that you have carried forward from the previous accounting period.

There are two rates of WDA for plant and machinery. To calculate them, you first group your expenditure into different pools:

  • the main pool - this includes expenditure on most items - the rate is 18 per cent
  • the special rate pool - this includes special rate expenditure including long-life assets, integral features, certain thermal insulation and some cars - the rate is 8 per cent

WDA for expenditure on short-life assets, or assets that you have used partly for non-business purposes, are calculated individually. That expenditure is therefore added into a separate pool for each asset, known as a single asset pool. A business may have several single asset pools. The rate of writing-down allowance to apply to each pool will depend on the type of asset on which the expenditure was incurred. Follow the link below for more information about writing-down allowances.

Writing-down allowances

Small Pools Allowance (SPA)

If in either the main or special rate pool the remaining balance is £1,000 or less after you have carried out the steps below, then instead of claiming a percentage writing-down allowance you can claim an allowance, sometimes called the SPA, for the whole amount remaining in that pool.

Steps to work out if you can claim the SPA for a given pool:

  • start with the unrelieved capital expenditure carried forward from the previous accounting period
  • add any new capital expenditure on which you have not claimed a first-year allowance in that period
  •  deduct the amount of AIA you wish to claim for the capital expenditure incurred in that period
  • add the balance of any expenditure in a previous period on which a first-year allowance was claimed and which you have not already brought into the pool
  • deduct any proceeds for items that you have sold or disposed of from that pool in that period
  • if the residual balance is £1,000 or less you can claim the SPA on the whole balance

The main or special rate pool will continue to exist, but the balance carried forward to the next year will be nil. Follow the links below for more information about SPA.

Small Pools Allowance - for residual balances of £1,000 or less

Plant and machinery allowance: first-year allowance

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Annual investment allowance (AIA)

AIA is available for most businesses, including partnerships. It is not available for trustees or mixed partnerships (partnerships which are not made up entirely of individuals).

Businesses can claim an AIA for capital expenditure incurred on most items of plant and machinery.

The AIA was introduced for expenditure incurred on or after 1 April 2008 for Corporation Tax or 6 April 2008 for Income Tax.

What you can and cannot claim for

Any new expenditure on plant and machinery assets bought after 1 April 2008 for Corporation Tax, or 6 April 2008 for Income Tax qualifies for AIA, apart from these exceptions:

  • cars - see the section below on capital allowances on cars
  • plant and machinery previously used for another purpose, for example, a computer used at home and introduced into your business
  • plant and machinery gifted to your business
  • expenditure incurred in the accounting period in which your business ceases

Qualifying expenditure: Annual investment allowance

How much you can claim

The amount you can claim depends on when you incurred the expenditure as shown in the table below. However, please read this in conjunction with the section below entitled 'calculating the AIA'  as the AIA that can be claimed for any accounting period that spans the date of a change in the  maximum  amount  of the AIA will be calculated under transitional rules.

If the AIA changed during your accounting period

Changes in the Annual Investment Allowance (AIA)
  For 1/6 April 2008 to 31 March/5 April 2010 From 1/6 April 2010 From 1/6 April 2012
AIA £50,000 £100,000 £25,000
It has been announced (subject to legislation), that the maximum amount of AIA will be increased from £25,000 to £250,000 for a temporary period of two years in relation to  expenditure  incurred on or after 1 January 2013

If the total you have spent in the period is more than the appropriate limit, you can claim up to the limit as annual investment allowance and may be able to claim another allowance for the remaining balance.

Calculating the AIA

If your accounting period spans the date of a change in the maximum amount of the AIA, there are special rules to calculate the maximum amount you can claim.

If the AIA changed during your accounting period

There are also separate rules for calculating how much allowance you can claim if your accounting period was more or less than 12 months.

Calculating allowances for accounting periods shorter or longer than 12 months

If your business is in a group or has related companies under common control and is liable to Corporation Tax, then only one AIA is available for the group or the related companies.

If you pay Income Tax and you or your partnership carries on two or more businesses that are related, then only one AIA is available for all the related businesses.

If an item is used partly for non-business use, you must reduce the amount you claim to reflect the expected non-business use.
You cannot claim the AIA for any expenditure on plant and machinery during the accounting period in which you stopped trading, or in which your company or organisation closed down.

Find out more about qualifying expenditure as a group or related companies

Find out more about what counts as related businesses

CA23080 - PMA: Qualifying expenditure: AIA qualifying expenditure: contents

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First-year allowances (FYA)

FYA, some of which are also known as 'enhanced capital allowances', are currently available to businesses on the expenditure on certain items such as energy-saving and water-efficient equipment, cars with very low carbon dioxide emissions and goods vehicles with zero carbon emissions. These allowances enable you to make a claim for up to 100 per cent of the cost of the item against your business profits in the year of purchase. There's more information on cars in this guide.

If you have incurred expenditure that you can claim a 100 per cent FYA against, then that expenditure has been 'fully relieved', and you will not be able to claim any other allowance on it.

First-year allowances: the basics

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Writing-down allowances (WDA)

WDA are annual allowances that you can claim to reduce or 'write down' any remaining balance of capital expenditure on plant and machinery that you have not already claimed a capital allowance for, referred to as a 'pool' of 'unrelieved' expenditure.

You apply WDA to the sum of the following:

  • any residual capital expenditure balances you have carried forward from previous years
  • added to the balance of any new capital expenditure in the accounting period (but not including the balance of any expenditure you have already claimed a FYA for - this goes into the pool for a following year)
  • less any claim for AIA allowance on any new capital expenditure in the accounting period
  • less the proceeds of equipment you have disposed of or sold

How much you can claim

There are two rates of WDA for plant and machinery, the rate for the main pool, 18 per cent, and the rate for the special rate pool, 8 per cent.

These rates apply to the calculation of capital allowances for accounting periods:

  • ending on or after 1 April 2012 for businesses within the charge to Corporation Tax
  • on or after 6 April 2012 for businesses within the charge to Income Tax

For previous rates see the table below. Because the rate changes have effect from a fixed date, those businesses with an accounting period that spanned  the date of the change will have a hybrid rate for the whole of that transitional period. If your accounting period spanned a date when the rate changed, see the pages in this guide on 'Calculating WDA if your accounting period spans a rate change'.

With the exception of short-life or part-private use assets, see below for more information, you can allocate unrelieved expenditure on your assets into two pools for the purposes of calculating your WDA.

Changes in the writing-down allowance (WDA)
Asset pool WDA before 1/6 April 2008 WDA from 1/6 April 2008 WDA from 1/6 April 2012
special rate pool The special rate pool was only introduced on 1/6 April 2008, so there was no rate applicable to it before that date. However, expenditure on long-life assets (now a type of 'special rate' expenditure) incurred before 1/6 April 2008 qualified at 6%. 10% 8%
main pool 25% 20% 18%

As the table above shows, the WDA rates changed from 1 April 2008 and again from 1 April 2012 for Corporation Tax and from 6 April for Income Tax. If your accounting period spans a date when the rate changes, follow the link below on 'Calculating WDA if your accounting period spans a rate change' and 'Calculating allowances for accounting periods shorter or longer than 12 months'.

Calculating writing-down allowances if your accounting period spans a rate change

Residual expenditure that goes into the special rate pool includes qualifying capital expenditure on:

  • some cars, see the section below on capital allowances on cars
  • plant and machinery that counts as thermal insulation or integral features in buildings - see the section below
  • long-life assets - any equipment with an expected useful economic life of over 25 years
  • cushion gas

Residual expenditure on everything else goes into the main pool, unless you make a short-life asset election or it is an asset with non-business use, in which case it goes into a single asset pool (see below). Note that the WDA that you claim is a percentage of the residual balance in a pool and not a percentage of the original amount of expenditure on an asset.

Once you have claimed the WDA on a pool, you reduce or write down the residual balance in that pool by the amount of your WDA claim and carry the new lower figure forward to the next accounting period.

The examples below are for 2011-12. If your accounts span a date of change of the maximum amount of AIA special transitional rules apply see the link below.

If the AIA changed during your accounting period:

Example one

If you are self-employed, pay Income Tax and spent £106,000 in the  2011-12 tax year on office furniture and machinery, you could have claimed the AIA of £100,000, and also  claim a 20 per cent WDA on the balance of £6000 ( WDA = £6,000 X 20% =£1,200)  - leaving £4,800 to carry forward to the period after that.

Example two

If you are self-employed and preparing accounts for the period 6 April 2011 to 5 April 2012 and you spent £110,000 on new electrical and heating systems for your shop, you could claim £100,000 as an AIA, leaving a balance of £10,000. The £10,000 could be allocated to the special rate pool and you could claim a WDA of 10 per cent of this figure, or £1,000, leaving a balance of £9,000 to be carried forward to the next accounting period.

Example three

Where relevant, you can choose to allocate expenditure to the most advantageous allowances that are available. You are self-employed, preparing accounts for the period 6 April 2011 to 5 April 2012, and in that period you spent £60,000 on new electrical and heating systems for your business and £70,000 on general equipment and a new van. You can allocate your £100,000 AIA first to the £60,000 spent on integral features, since these would otherwise only attract the 10 per cent WDA. This leaves an AIA of £40,000 that you can allocate to your £70,000 general equipment expenditure leaving a balance of expenditure of £30,000. Finally, you can allocate the £30,000 expenditure to the main pool and claim a WDA of 20 per cent of £30,000 - £6,000 - leaving £24,000 to be carried forward to the next accounting period.

Small Pools Allowance (SPA) - for residual balances of £1,000 or less

If in either the main or special rate pool the remaining balance is £1,000 or less after you have carried out the steps below, then instead of claiming a WDA you can claim an allowance, sometimes called the SPA, for the whole amount remaining in that pool.

Steps to work out if you can claim the SPA for a given pool:

  • start with the unrelieved capital expenditure carried forward from the previous accounting period
  • add any new capital expenditure on which you have not claimed a FYA in that period
  • deduct the AIA you are claiming
  • add the balance of any expenditure in a previous period on which a FYA was claimed which you have not already brought into the pool
  • deduct any proceeds for items that you have sold or disposed of from that pool in that period
  • if the residual balance is £1,000 or less you can claim the SPA on the whole balance

The main or special rate pool will continue to exist, but the balance carried forward to the next year will be nil. For more information, see the section below on the 'Small Pools Allowance'.

Assets used partly for non-business use - special rules

You do not add expenditure on assets that are used partly for non-business into either the main or special rate pools. Instead, to enable you to work out the allowances that you can claim for your business use, you calculate writing-down allowance for each asset individually in a single asset pool:

  • use the writing-down rate for the special rate pool, 8 per cent, for assets listed above in the explanation of the special rate pool
  • use the rate for the main pool, 18 per cent for everything else

Remember that the amount of WDA will be reduced in proportion to your business use.

Short-life assets and WDA

You do not add the expenditure on assets that you have elected to treat as short-life assets into the main or special rate pools mentioned above. Instead, you need to calculate the WDA for each short-life asset individually in a single asset pool, using the writing-down rate for the main pool,(18 per cent), because you cannot make a short-life asset election for special rate expenditure. For further guidance, follow the link below on short-life assets and capital allowances.

Short-life assets and capital allowances

Find out more about the rules for writing-down allowances

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Small Pools Allowance (SPA)

The WDA for small pools, sometimes referred to as the 'SPA', allows you to write off either the main or special rate pool or both of them if the balance in that pool is £1,000 or less. It applies to the total in either pool of:

  • any brought forward residual balance from the previous accounting period
  • plus new expenditure
  • less AIA 
  • less any disposal proceeds of assets you have sold or otherwise disposed of in the period

If the sum of the expenditure brought forward plus any new expenditure (less AIA), less any disposal proceeds in a pool exceeds £1,000, then you cannot claim the WDA for small pools for that pool. You can claim a SPA for either or both the main pool and the special rate pool if either or both meet the conditions.
Note that the allowance of £1,000 must be adjusted proportionately for accounting periods longer or shorter than 12 months. Follow the links below for more information on calculating allowances for accounting periods shorter or longer than 12 months and for pools and WDA.

Calculating allowances for accounting periods shorter or longer than 12 months

Pools and writing-down allowances

What accounting periods you can claim for

The WDA for small pools applies to accounting periods that began on or after 1 or 6 April 2008.

How much you can claim

If the total, as calculated above, in either the main or special rate pool is £1,000 or less, you can claim a SPA up to or equal to that total.

Example one

If you pay Income Tax and you spent £100,500 on furniture and machinery during the 2011-12 tax year, and have no balance carried forward from the previous accounting period and made no disposals in the period, you can claim the full £100,000 AIA.. The balance of £500 can be then added to the main pool. Because the unrelieved expenditure of £500 is less than £1,000 and you have no brought-forward main pool, you can claim the remaining £500 as the WDA for small pools, leaving the main pool carried forward with a nil balance.

Example two

You spent £1,500 on furniture in May 2012 and also brought forward a main pool of £700 from the previous year. There were no other additions or disposals. You can claim an AIA for the full £1,500 and a WDA for small pools for the £700 pool brought forward. The balance of the main pool to carry forward to the next accounting period is nil.

Note that the WDA for small pools is not available for short-life or part non-business use assets.

Find out more about claiming the writing-down allowance for small pools

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Capital allowances on cars

The rules for claiming capital allowances on cars changed for cars that were purchased on or after 1 April 2009 for Corporation Tax purposes and on or after 6 April 2009 for Income Tax purposes.

Since 17 April 2002 certain very low CO2 emission cars, including electrically propelled cars, qualify for a 100 per cent FYA.

Definition of car for capital allowance purposes

For capital allowance purposes, a car is any mechanically propelled road vehicle unless it is:

  • constructed in such a way that it is primarily suited for transporting goods of any sort
  • not commonly used or suitable for use as a private vehicle

This means that vans and lorries are not considered to be cars, whereas motor homes are. However, certain vehicles such as driving school vehicles with dual control are not treated as cars for capital allowance purposes although they may be classed as cars for other tax rules. For purchases on or after 1/6 April 2009 motorcycles are not cars for capital allowance purposes, though they were before that date.

If a vehicle is not a car, the special rules for cars do not apply to it and the other allowances in this guide may be available.

Please note that this definition of a car for capital allowances may not be the same as that used for other aspects of your Income Tax or Corporation Tax, or for other taxes such as VAT, or by other government departments.

Capital allowances on cars bought on or after 1/6 April 2009

The capital allowances you can claim on your cars are based on CO2 emissions, which are shown on the car's V5 certificate.

Check your car's CO2 emissions on the Vehicle Certification Agency (VCA) website (Opens new window)

If your car does not have an emissions figure because it was first registered before 1 March 2001 then the expenditure is allocated to the main pool, or a single asset pool if there is non-business use, see below.

If your car does not have an emissions figure but it was first registered after 1 March 2001 then the expenditure is allocated to the special rate pool, or a single asset pool if there is non-business use, see below.

The table below only applies to cars with 100 per cent business use.
CO2 emissions Capital allowances treatment of expenditure
Over 160 grams per kilometre (g/km)
The threshold will be reduced to 130g/km from 1/6 April 2013 (subject to legislation)
Goes into the special rate pool and qualifies for writing-down allowances at the rate for the special rate pool (8 per cent per annum).
160g/km or less
The threshold will be reduced to 130g/km from 1/6 April 2013 (subject to legislation)

Goes into the main pool and qualifies for writing-down allowances at the rate for the main pool, (18 per cent per annum).

Expenditure on second hand cars with very low carbon dioxide emissions is pooled in the main pool

For new unused cars with very low CO2 emissions see the box below.
110g/km or less (but note that the threshold will be reduced to 95 g/km from 1/6 April 2013 (subject to legislation) If you buy a new, unused car you can claim up to 100 per cent allowance in the accounting period when it was bought, the balance (which may be nil) goes into the main pool in the next year. For detailed guidance, see the guide First-year allowances: the basics

Example: If you are self-employed, you pay Income Tax and your accounts are drawn up for the year to 5 April 2013 and you spent £20,000 on a car that you use 100 per cent for your business that has CO2 emissions of 165g/km, the calculation is as follows:

Cost of car = £20,000
WDA deducted (£20,000 x 8%) = £1,600
Value to carry forward = £18,400
Capital allowance you can claim = £1,600

Note that there are special rules for cars that are not used wholly for business purposes, for example, for private use. To check the details see the section below 'If you or an employee use the car partly for non-business use'.

Capital allowances for cars bought before 1/6 April 2009

Capital allowances treatment according to vehicle cost
Original cost Capital allowances treatment of expenditure
Up to £12,000 with 100 per cent business use The cost or value was added to the main pool and qualified for WDA at the rate for the main pool.
Up to £12,000 with non-business use The cost or value was added to a single asset pool (one for each mixed-use car) and qualified for WDA at the rate for the main pool and the allowance was then restricted to reflect non-business use.
More than £12,000 The cost or value was added to a single asset pool (one for each car) and qualified for WDA at the rate for the main pool. The allowance was then restricted to a maximum of £3,000 per year and was further restricted to reflect any non-business use.

The above rules in relation to expenditure on expensive cars in single asset pools continue for a transitional period of five years ending on the last day of the first accounting period to end on or after 5 April 2014. After this date, the balance is moved into the main pool unless the car was used for non-business purposes. For more information, follow the link below on writing-down allowances.

Writing-down allowances

Example: If you are self-employed, pay Income Tax, your accounts are drawn up for a full year to 5 April 2012 and you spent £25,000 before 6 April 2009 on a car that is used wholly for business purposes, then the calculation is as follows:

Cost of car in 2008-09 = £25,000
Balance brought forward from 11/12 = £ 12,800
WDA (£12,800 x 18% ) = £2,304 less than £3,000 so no restriction required. WDA you can claim in the year = £2,304
Balance after allowance £10,496

If you or an employee use the car partly for non-business use

There are special rules for items that are not used wholly for business purposes - for example, for private use. These rules, summarised below, apply to expenditure on cars incurred both before and after 1/6 April 2009.

If you are a self-employed individual or partner in a partnership, pay Income Tax and use one or more cars yourself partly for non-business purposes, you will have to work out the capital allowances for each car separately. You do so by adding the expenditure for each car to a single asset pool and calculating the maximum allowance available for that expenditure. You must then reduce your claim by the amount of your non-business use so that only the business use proportion is taken into account.

If your business provides cars to employees and they use them for private purposes, the cars are treated as being for 100 per cent business use. However, the expenses and benefits tax rules for cars provided to employees will apply. Follow the link below for more information on expenses and benefits for employers.

Expenses and benefits at the end of the tax year

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Short-life assets and capital allowances

The short life asset rules (SLA) let you write off the cost of an asset over its life in your business. This is done by putting the expenditure on that asset in a single asset pool and having a balancing adjustment when the asset is disposed of or scrapped. An asset is only a short life asset if you elect to treat it as one. You may wish to consider whether to elect for the SLA treatment if you expect to sell or scrap an asset, for less than its tax written down value, within eight years of the end of the chargeable period in which you acquired it. There is no definition of a SLA. All that matters is that an election is made and that the asset is not specifically excluded.

Some assets are excluded from the SLA treatment (for example most cars, assets used partly for non business use and 'special rate' items)

Legislation was introduced after Budget 2011 to increase the period over which expenditure on plant or machinery can be given 'short life asset' treatment from four years to eight years.

This change had effect for expenditure on plant and/or machinery incurred:

  • on or after 1 April 2011 for business within the charge to corporation tax
  • on or after 6 April 2011 for business within the charge to income tax

How to make a short-life asset election

If you are self employed and subject to Income Tax and you decide to use this treatment and make an election, you must inform HMRC in writing of your decision - no later than the first anniversary of 31 January following the end of the tax year in which you acquired the item. For example if you bought a computer in the accounting period ended 31 July 2012, you must make the election by 31 January 2015. You cannot withdraw an election once it has been made.

If your business pays Corporation Tax, different rules apply.

Claims and elections for Corporation tax

What qualifies as a short life asset

WDA for short-life assets

Strictly each short life asset should go into its own separate single asset pool so that the allowances on it can be calculated separately. The rate of WDA is that for the main pool, 18 per cent. Where very small items of the same type are in a group and purchased together as such, for example, glasses in a restaurant - it is usually acceptable to nominate each group of items purchased together as a short-life asset.

When you sell or dispose of a short-life asset

If you sell or dispose of a short-life asset either four years or eight years, depending on when you bought it and which time limit applies, of the end of the accounting period when you acquired it, what you do depends on how much you sell it for or on its market value if you dispose of it, for example, throw it away or give it away.

If you sell it for less than the written down value in the short-life asset pool, or you give it away and the market value is less than the written down value in the short-life asset pool, then you can adjust your capital allowances by claiming a balancing allowance for the difference. This has the effect of reducing your taxable profits. For more information, follow the link below on calculating and claiming plant and machinery allowances.

Calculating and claiming plant and machinery allowances

If you sell it for more than the written down value in the short-life asset pool, or you give it away and the market value is now more than that value, you will need to show a balancing charge in your tax return. A balancing charge has the effect of increasing your taxable profits. For a detailed explanation, follow the link above on calculating and claiming plant and machinery allowances. The only exceptions are if you give the asset to a charity or Community Amateur Sports Club (CASC) or gift it to an employee in circumstances such that there is a charge to tax under ITEPA (the Income Tax (Earnings and Pensions) Act) 2003. In these cases, the disposal value is treated as nil for capital allowance purposes.

For more information, see the section below on selling, gifting or disposing of pooled assets.

Short-life assets still in use after four or eight years - depending on when you bought it and which time limit applies

If you are still using the asset at the end of either the four or eight years after the accounting period in which you acquired it you should transfer the residual carried-forward value into your main pool in your next accounting period.

The rules for short-life assets

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Selling, gifting or disposing of pooled assets

The rules below apply only to assets that you initially claimed capital allowances for.

Selling or disposing of pooled assets

If you sell or otherwise dispose of a pooled asset, you have to deduct the disposal value from any remaining balance in the relevant pool (main or special rate) in which the expenditure on it was included. Remember if you claimed a 100 per cent FYA, or claimed the full cost of an asset by AIA, the asset is still deemed to have been taken to the appropriate pool, although the value remaining in the pool after your claim to the 100 per cent allowance or AIA would be nil.

If the disposal value of the item is less than the remaining value in that pool, then you simply reduce the value of the appropriate pool, unless you dispose of assets in the accounting period when the business ceases, see below for more information.

If the disposal value is more than the value of the pool, this results in a 'balancing charge' equal to the difference. The main and special rate pool may have a balance carried forward of nil due to annual investment allowance being claimed in previous years.

The disposal value is usually:

  • if you sold it for the market value or more - how much you sold it for
  • if you sold it at less than market value - the market value unless you sold it to someone who claims capital allowances when it is how much you sold it for
  • if you gave it away - the market value
  • if you simply stopped using it in the business - the market value
  • if you gave it to charity or a CASC - nil
  • if you gifted it to an employee in circumstances such that there is a charge to tax under ITEPA (the Income Tax (Earnings and Pensions) Act) 2003 - nil

But if the sale proceeds or market value is more than the original cost of the asset, you will normally limit the disposal value to that original cost. However, if you acquired the asset from a connected person, see below, and it originally cost them more than they sold it to you for, you limit the disposal value to what it cost them, not what they sold it to you for. Therefore, whether you sell the item or give it away, the balancing charge can still apply.

See below for examples. For more on selling and disposing of assets follow the link below on ceasing your business and capital allowances.

Ceasing your business and capital allowances

Connected persons

A connected individual is a close relative, a spouse or civil partner, or someone related to you by marriage or civil partnership. A company is connected with another if, for instance, the two companies are controlled by the same person or by connected individuals or if one company controls the other.

Definitions: connected persons

Giving an asset away to a charity

If you give a used piece of equipment to a charity or CASC, the disposal value may be nil in certain circumstances.

Capital allowances and gifts to charity

Disposal example - balancing charge

You are self-employed, pay Income Tax and have a main pool brought forward of £10,000 from the previous year. You do not buy anything else in the current year, but you sell a lathe for £11,000, your capital allowance calculation is as follows:

Main pool brought forward = £10,000
Minus disposal proceeds = £11,000
Balancing charge to enter on tax return = £1,000
Main pool value carried forward = £0

This means you cannot claim any WDA for the current year since there is nothing left in the pool. You will also have to add that balancing charge of £1,000 to your trading profits when calculating the profit figure to enter on your tax return.
If you gave the lathe away, other than to a charity, CASC or employee where there was a charge to tax under ITEPA 2003, then you must use its market value in the computation as the disposal proceeds. Therefore, your capital allowance calculation would be:

Main rate pool brought forward = £10,000
Minus market value = £11,000
Balancing charge = £1,000
Main rate pool value carried forward = £0

Disposal example - no balancing charge: You have a main pool brought forward of £5,500 and during the current year you sell a van for £4,000. You do not sell or buy anything else. Your capital allowance calculation is:

Main pool balance brought forward = £5,500
Minus disposal proceeds = £4,000
Main pool value balance = £1,500
This means you can now calculate WDA on the remaining pool value of £1,500.
The WDA would be £270 ( £1,500 X 18%)
So main pool value carried forward = £1,230  (1500 - 270)

Disposal example - qualifying gift to charity: You have a main pool brought forward of £10,000 and you gave away a lathe worth £11,000 to an educational charity that teaches woodwork. You do not buy or dispose of any other equipment during the period. Your capital allowance calculation is:

Main rate pool brought forward = £10,000
If you met the conditions for donations to charity, the gift has no effect on the pool value (as the disposal proceeds are treated as nil), and does not give rise to a balancing charge. This means you can claim WDA on the pool balance of £10,000 (£10,000 x 18% = £1,800)

Disposal example - balance brought forward nil: You have a main pool brought forward of nil for and during the year you buy a van for £12,000 and claim annual investment allowance on the whole amount. The following year you do not buy or sell anything else but the van which you sell for £8,000. Your capital allowance calculation is:

Main rate pool brought forward = £0
Disposal value = £8,000
Balancing charge = £8,000
Main rate pool balance carried forward = £0

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Ceasing your business and capital allowances

This page deals with ceasing a business if you are self-employed or a partner. If your company or organisation is liable for Corporation Tax and you cease it and sell its assets see our guide below for more information.

Selling or closing your company and Corporation tax

Self-employed people or partners

If you are a self-employed person or partner in a partnership and pay Income Tax on your business profits and the business (your business if you are a sole trader or the partnership business if you are a partner) ceases for any reason, you can claim capital allowances called balancing adjustments. If you:

  • sell any assets, you should deduct what you sold them for from the appropriate pool or the remaining asset value in the case of short-life assets, limited to the original cost unless you originally bought the asset from a connected person, see below.
  • have sold your assets to a connected person who cannot claim capital allowances for below market value, you should deduct the market value instead
  • keep any assets personally, you should deduct their market value from the appropriate pool or the remaining asset value in the case of short-life assets

You have to follow these rules even if you originally claimed one of the 100 per cent allowances for the asset in question.

If these disposal values are more than the remaining value of the pool or short-life asset, you have to calculate the difference and add this amount to your profits. This adjustment is known as a balancing charge and has the effect of increasing your profits liable to tax.

Example one

You have been in business for many years and draw up your accounts to 5 April each year. At 6 April in the final year, the value in the pool (that has been carried forward from 5 April in the previous year) is £10,000. You then stop trading on 1 July and sell all the assets in your pool for £17,000. Your capital allowance calculation is:

Disposal value = £17,000
Minus pool value brought forward = £10,000
Balancing charge of = £7,000

If the disposal values are less than the value of the pool/short-life asset pool, you can claim the value remaining as a balancing allowance. This adjustment has the effect of reducing your tax liability.

Example two

You have been in business for many years and draw up your accounts to 5 April each year. At 6 April in the final period, the value in the pool is £10,000. You do not buy or sell anything from that date until you stop trading on 1 July 2009. You keep a word processor with a market value at 1 July 2009 of £2,000. You then sell the other business assets for £7,000. Your capital allowance calculation for the final period is:

Pool value brought forward = £10,000
Minus disposal proceeds (£7,000 + £2,000) = £9,000
Balancing allowance = £1,000

If you sell or keep an item whose value has increased

If you sell any items that were included in a capital allowance pool for more than you originally paid for them, or their value (if you keep them for your personal use) is more than you paid for them, you should deduct only the amount you originally paid for those items from the pool, and not the actual sale proceeds or value.

If you originally acquired an item from a connected person

If you originally acquired the item that you are selling or disposing of from a connected person and the sale proceeds or market value are more than it cost you (value A) and also more than it cost the connected person when they bought it (value B), then the amount you should deduct from the pool is whichever cost is the greater of A and B. If however the sales proceeds are greater than A but less than B then the value you use is whichever is the greater of the sales proceeds or market value, and B.

Example one

If the asset cost the connected person £10,000 (B) and he or she sold it to you for £5,000 (A) and the sales proceeds are £6,000 then the sale proceeds are more than A but less than B. So, you would use the sales proceeds - that is £6,000 as the disposal value.

Example two

If the asset cost the connected person £10,000 (B) and he or she sold it to you for £5,000 (A) and the sales proceeds are £12,000 then the sale proceeds are more than both A and B. So, you would use B - that is £10,000 as the disposal value.

Connected persons

A connected individual is a close relative, a spouse or civil partner, or someone related to you by marriage or civil partnership. A company is connected with another if, for instance, the two companies are controlled by the same person, by connected individuals or if one company controls the other.

Definitions: connected persons

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Calculating allowances for accounting periods shorter or longer than 12 months

If your accounting period is shorter or longer than 12 months, there are rules for calculating the amount of capital allowances you are entitled to claim. Please note that the term 'accounting period' is used throughout this guide, but you will see the term 'chargeable period' used in the HMRC capital allowances Manual.

Accounting periods of less than a year

If your accounting period is less than 12 months then the amount of allowance you can claim is reduced accordingly.

This does not apply to the 100 per cent FYA (including enhanced capital allowances). In these cases, you can claim the full 100 per cent for expenditure that that was incurred in a qualifying period or on a qualifying date.

Accounting periods of longer than a year but less than 18 months

If you pay Income Tax and your accounting period is more than 12 months but less than 18 months, then the amount of allowance that you can claim is adjusted accordingly.

If your company pays Corporation Tax, the accounting period can never be more than 12 months.

Accounting periods of longer than 18 months

If you pay Income Tax and your accounting period is longer than 18 months, you must split it into shorter periods and make separate capital allowance calculations for each of them.

The first 12 months will form a period and each subsequent 12-month period, or period of less than 12 months, will form further periods. For example, if the period of account is the 20 months from 1 January 2012 to 31 August 2013, you should split it into 12 months to 31 December 2012 and 8 months to 31 August 2013 and apply the rules above.

Accounting periods that span the date of an allowance change

If your accounting period spans the date when an allowance changed, there are special ways in which you calculate how much allowance you can claim. See the pages in this guide: if the AIA changed during your accounting period and calculating WDA if your accounting period spans a rate change.

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If the AIA changed during your accounting period

The AIA applies only to expenditure on or after 6 April 2008 for Income Tax, or 1 April 2008 for Corporation Tax. Where accounting periods started before that date, the AIA was proportionately reduced. If your accounting period spans the dates when the AIA changed, there are special, transitional rules for calculating how much allowance you can claim.

If your accounting period spanned 1/6 April 2010

Where an accounting period spans 1/6 April 2010, the maximum allowance is the sum of:

  • the maximum entitlement based on £50,000 for that portion of a year falling before the date the limit changed
  • the maximum entitlement based on £100,000 for that portion of a year after the date the limit changed

However, only a maximum of £50,000 AIA can be claimed in respect of expenditure in that part of the accounting period that falls before 1/6 April 2010.

Example: a company that pays Corporation Tax calculates its AIA for an accounting period 1 January 2010 to 31 December 2010 as follows:

  • the portion of a year from 1 January 2010 to 31 March 2010, that is, 3/12 x £50,000 = £12,500
  • the portion of a year from 1 April 2010 to 31 December 2010, that is, 9/12 x £100,000 = £75,000

The total AIA is £87,500, but the maximum AIA available for expenditure in the first three months of the year is £50,000.

If your accounting period spans 1/6 April 2012

Where a business has an accounting period that spans 1/6 April 2012 - the date of the decrease from £100,000 to £25,000 - the maximum allowance for that business's transitional period is made up of two parts:

  • the AIA entitlement, based on the previous £100,000 annual cap for the portion of a year falling before the date of the change
  • the AIA entitlement, based on the new £25,000 cap for the portion of a year falling on or after date of change

Example: a business with a calendar year accounting period from 1 January 2012 to 31 December 2012 would calculate its maximum AIA entitlement based on:

  • the proportion of a year from 1 January 2012 to 31 March 2012, that is, 3/12 x £100,000 = £25,000
  • the proportion of a year from 1 April 2012 to 31 December 2012, that is 9/12 x £25,000 = £18,750

The business' maximum AIA for this transitional accounting period would therefore be the total of (a) + (b) = £25,000 + £18,750 = £43,750.

However, for the part period falling on or after 1 April 2012 even if the company spent more than £18,750 no more than £18,750 of the business' actual expenditure in that part period would be covered by its AIA entitlement.

If your accounting period 1 January 2013

Legislation will be introduced in 2013 to increase the maximum amount of the AIA from £25,000 to £250,000 for a temporary period of two years for expenditure on or after 1 January 2013.

If your accounting period began on or after 6 April 2012, you calculate your maximum AIA for this period in two parts:

  • The AIA entitlement, based on the previous  £25,000 annual cap for the portion of a year falling before 1 January 2013.
  • The AIA entitlement based on the new £250,000 for the portion of a year falling on or after 1 January 2013.

Example:

For the period 6 April 2012 to 5 April 2013 you calculate your maximum AIA entitlement based on both:

  1. the proportion of a year  from 6 April 2012 to 31 December 2012 , that is 9/12 x £25,000 = £18,750
  2. The proportion of a year from 1 January 2013 to 5 April 2013, that is 3/12 x £250,000 = £62,500.

The maximum AIA for this period is £18,750 + £62,500 = £81,250 but you cannot claim more than £25,000 AIA for the first period.

Example

Your accounts run from 6 April 2012 to 5 April 2013. You spend £35,000 in total on general equipment during the year all before 1 January 2013 and the total expenditure was pooled. You can claim £25,000 AIA. The balance of £10,000 will qualify for 18% WDAs. So you can claim £25,000 AIA plus £1,800 WDA. The balance to be carried forward to the next year is £8,200

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Calculating WDA if your accounting period spans a rate change

If your accounting period spans one of the dates when the WDA changed, there are special, transitional rules for calculating how much allowance you can claim.

If your accounting period spans 1/6 April 2008

The rate of WDA for business expenditure on plant and machinery changed from the 6 April 2008 for Income Tax, 1 April 2008 for Corporation Tax:

  • from 25 per cent to 20 per cent for general plant and machinery
  • from 6 per cent to 10 per cent for long-life plant and machinery

Therefore, for accounting periods that started before 6 April 2008 for Income Tax, before 1 April 2008 for Corporation Tax and ended in or after 6 April 2008 for Income Tax, 1 April 2008 for Corporation Tax, a hybrid rate of WDA applies.

If your accounting period spans 1/6 April 2012

If your business' accounting period spans the date for the change of rate of WDA (1 April 2012 (Corporation Tax) or 6 April 2012 (Income Tax)), a hybrid rate is used to calculate the rate of WDA for that transitional period.

The hybrid rate for the main plant and machinery pool is arrived at by calculating the proportion (in days) of the chargeable period falling before the change date, and the proportion (in days) falling after it, calculating the rate for each portion at the 20 per cent and 18 per cent rates respectively, and then adding the two percentages together.

The hybrid rate for the special rate pool is calculated in the same way, but by applying the 10 per cent and 8 per cent rates to the portion of the period before and after the change date respectively, and once again, by then adding those two percentages together.

Example

A company with a calendar year accounting period from 1 January 2012 to 31 December 2012 (a leap year) would calculate its hybrid rate for WDA entitlement based on:

  • number of days 1 January 2012 to 31 March 2012, that is, 91/366 × 20 per cent = 4.97 per cent
  • the proportion of a year from 1 April 2012 to 31 December 2012, that is, 275/366 × 18 per cent = 13.52 per cent

The hybrid main rate WDA for this transitional accounting period would therefore be the total of (a) + (b) = 18.49 per cent.

The calculation of the hybrid rate for the special rate of WDA would be as follows:

  • (a) 91/366 × 10 per cent = 2.49 per cent plus
  • (b) 275/366 × 8 per cent = 6.01 per cent

The hybrid special rate for this transitional period is the total of (a) + (b) = 8.5 per cent.

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Calculating and claiming plant and machinery allowances

To calculate your capital allowances, you should follow the key steps set out below. Please refer to the other pages in this guide for more information on each type of allowance. You'll also find links at the end of the page to guidance on completing your Company or Self Assessment tax return.

  1. Find out which value to use - see the page in this guide on values to use when calculating capital allowances.
  2. Check if you can claim any 100 per cent FYA - some of these are also known as 'enhanced capital allowances'. Note: if you do not claim all of the FYA you are entitled to claim you don't put the balance of unrelieved expenditure into this year's pool - it has to go into a following year's pool.
  3. Check if you can claim the AIA.
  4. Check your balance of unrelieved expenditure brought forward from the previous year and (where relevant) add on any unrelieved balance not covered by  a FYA in an earlier period.
  5. Add to this any new expenditure not covered a 100 per cent FYA.
  6. Deduct any AIA you are claiming.
  7. If you sold or disposed of any main rate or special rate pool assets, deduct the appropriate disposal value from the relevant pool total.
  8. If the disposal value exceeds the relevant pool total, record a balancing charge.
  9. If after following the steps above the total value in either the main rate or special rate pool is £1,000 or less, see if you can claim the small pools allowance for that pool.
  10. If the total value is more than £1,000 in either pool apply the relevant rate of WDA (18 per cent or 8 per cent) to work out your WDA for that period.
  11. Deduct these allowances from the relevant total in each pool in order to work out the pool values to be carried forward to the next period.
  12. If you sold or disposed of any short-life assets within four years or eight years of the end of the accounting period in which you acquired them (see the notes on short life assets in this guidance), or you sold or disposed of any asset in a single asset pool, claim a balancing allowance if the disposal value is less than the unrelieved expenditure in the pool. If the disposal value is more than the unrelieved expenditure in the pool, you will need to record a balancing charge.
  13. If your business is ceasing and the disposal value of the assets in any of your pools is less than the unrelieved expenditure in that pool then you can claim a balancing allowance in respect of the difference.

You can claim your plant and machinery allowances through your Self-Assessment Income Tax return or Corporation Tax return.

Your tax return: the basics

The Company Tax Return: the basics

The effect of capital allowances on your profit or loss figure

When you calculate the profit or loss figure for your tax return, you should:

  1. start with your business' profit or loss figure
  2. subtract the total value of the capital allowances you are claiming
  3. subtract the total value of any balancing allowances
  4. add the total value of any balancing charges

If you pay Corporation Tax, this calculation forms part of your tax computation. If you pay Income Tax, there are spaces on the form where you include the specific capital allowances you are claiming.

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Values to use when calculating capital allowances

To calculate your plant and machinery allowances, you will have to start with the cost of the asset or assets you bought.

Outright purchases

The amount of allowance you can claim is based on how much the item cost you, including any costs directly related to the acquisition, but not interest or finance costs, and installation of the item that you also had to pay.

If you bought something to use in your business, for example a van, on hire purchase or by an alternative finance method, you can only claim capital allowances on the cost of the item itself. The interest or other charges count as business expenses.

VAT

When you buy an asset, sometimes you will have to pay VAT. If so, then:

  • if you are registered for VAT including the Flat Rate Scheme, and can claim back the VAT on that purchase, you should only claim capital allowances on the net cost of the asset
  • if you are not registered for VAT or can only claim an element of the VAT you have incurred, for example, if you are partly exempt, include the irrecoverable VAT that you paid in the amount you're claiming capital allowances on

Gifts and connected persons

You can ask HMRC or your tax adviser for further advice if:

  • someone else pays part of the cost, for example, by giving you a grant
  • you had purchases from, or sales to, members of your family or other connected persons

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Getting help

If you need help calculating capital allowances or need other advice, you can ring the HMRC Self Assessment Helpline.

Contact details for HMRC Self Assessment Helpline

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