Guidance

HS252 Capital allowances and balancing charges 2023

Updated 6 April 2024

The following guidance includes calculations.

Overview

Capital allowances are given for a chargeable period. For companies a chargeable period is their accounting period. An accounting period cannot exceed 12 months, but it can be shorter. For self-employed businesses a chargeable period is the business’ period of account. A period of account can be longer or shorter than 12 months.

You cannot claim capital allowances if you use cash basis, there is an exception for expenditure on cars. Find out how to calculate your taxable profits in Helpsheet 222.

From 29 October 2018, a capital allowance for the qualifying costs of constructing new, non-residential structures or buildings is available called Structures and Buildings Allowance. Check if you can claim capital allowances for structures and buildings. An enhanced rate of Structures and Buildings Allowance is available for structures and buildings in Freeport tax sites.

Until 30 September 2026, for new, non-residential structures or buildings in a designated Freeport tax site, the qualifying costs of construction may qualify for an enhanced rate of structures and buildings allowance. Read Enhanced Structures and Buildings allowances in Freeports to check if you can claim enhanced capital allowances for structures and buildings.

If you’re running a business, you may need to buy certain items such as tools and equipment to help you to carry out your work. If the items are small in value, for example items of stationery, and used in the day-to-day running of the business, you can claim the cost of these items as an allowable expense in computing the profits of your business. You cannot claim capital allowances for any cost that you can claim as an allowable expense. Find more information on expenses if you’re self-employed.

If you buy other plant and machinery that you keep to use in your business, such as cars, tools, equipment, desks or computers, you cannot claim the cost as an allowable expense; you may be able to claim capital allowances instead.

Capital allowances are available from the date your business starts. You can also claim capital allowances for items bought before your activity commenced; the expenditure is treated as incurred on the date of commencement if the asset has been provided for the business.

Capital allowances for plant and machinery, such as tools, equipment or computers, are called plant and machinery allowances. Plant and machinery allowances do not cover:

• stock — items that your business buys and sells as part of its trade
• furniture, fixtures and equipment in a let residential property, unless it is a qualifying furnished holiday letting
• land, buildings and parts of buildings, apart from certain parts of buildings such as electrical, lighting, heating and ventilation systems

Who can claim plant and machinery allowances

You can claim plant and machinery allowances if you have a business, and you buy assets for that business which you keep to use in that business. You can claim if you’re:

• self-employed
• a partnership
• a company or organisation that pays Corporation Tax
• a landlord — but not for residential properties that are not furnished holiday lets
• an employee who buys equipment that they need to do their job, because their employer doesn’t provide the item — not cars, vans, motorbikes or bicycles

Claiming capital allowances

You pool (add together) the cost of your item with the cost of any other items bought for business use during the year. Your allowance is worked out on the total amount in the pool, not on the cost of each item.

What you can put in the pool

You can include:

• the cost of the item, less VAT — unless you are not registered for VAT
• the cost of improving plant or machinery
• the cost of installing plant or machinery
• the original cost (not interest or charges) of plant or machinery bought on hire purchase or other finance methods, such as a loan

If your item was a gift, you add to the pool the market value of the item on the day your business started to use it. If you bought the item for another purpose before using it in your business, you add to the pool the lower of the original cost and the market value on the day your business started to use it.

Types of plant and machinery allowance pools

There are 3 types of pools where you put the cost of your bought or gifted items.

Main pool

Use the main pool for all qualifying expenditure that does not go into either a class pool or a single asset pool. This will cover the majority of equipment bought by your business. Do not include cars with higher CO2 emissions.

Class pools

The special rate pool is a class pool used for expenditure incurred on the following items:

• certain building fixtures or integral features of buildings, such as electrical systems — wiring, lighting, heating or ventilation systems
• long-life assets — equipment with an expected business life of 25 years or more
• cars with higher CO2 emissions
• solar panels
• thermal insulation added to existing buildings

Single asset pools

Certain expenditure must be put in a single asset pool instead of going into the main or class pool.

Items of equipment, including cars, you use for both business and private purposes do not go into your main or special rate pool. Instead, you put the cost of each into its own single asset pool.

If you’re an employee and receive a payment from your employer to cover any fall in the value of an asset that you own and use in your work, you put the asset in a single asset pool and take off your employer’s payment from the pool’s value. (This will reduce your annual investment allowance (AIA) and writing down allowance (WDA)).

Single-asset pools must also be used for expenditure on short-life assets (see below) and for contribution allowances claimed on plant and machinery.

How much you can claim

100% first-year allowances

You can claim 100% of the cost of specific assets in the chargeable period that you buy them. These include:

• new electric cars and new cars with zero carbon dioxide emissions
• certain new vehicle gas refueling equipment
• certain new vehicle electric charge point equipment
• new zero-emission goods vehicles
• new plant and machinery bought by a company for use in designated areas within certain enterprise zones
• new plant and machinery bought by a company for use in a Freeport tax site

You claim first-year allowances before you add the cost of the item to the pool. So, if you claim a 100% first-year allowance, the amount you add to the pool for that piece of equipment is nil. But if you later sell it, you deduct the price you receive from the pool. This can result in a balancing charge.

130% super-deduction first-year allowance

Companies within the charge to corporation tax can claim 130% of the cost of main rate plant and machinery, except for cars, in the accounting period in which the assets are bought. To qualify:

• the expenditure must be incurred on or after 1 April 2021 and before 1 April 2023 and must not be as a result of a contract entered into before 3 March 2021
• the asset must be unused and not second hand
• it must not be provided for leasing (unless the lease is of background plant or machinery within a building)

Companies cannot claim the 130% super-deduction for special rate assets, such as integral features of buildings or structures, solar panels and assets with an expected life of at least 25 years. These may qualify for the 50% special rate allowance instead.

Companies will be liable to a balancing charge if they sell an asset for which a 130% super-deduction has been claimed. The balancing charge may be up to 130% of the disposal value.

50% special rate first-year allowance

Companies within the charge to corporation tax can claim 50% of the cost of special rate plant and machinery, except for cars, in the accounting period in which the assets are bought. To qualify:

• the expenditure must be incurred on or after 1 April 2021 and before 1 April 2023 and must not be as a result of a contract entered into before 3 March 2021
• the asset must be unused and not second hand
• it must not be provided for leasing (unless the lease is of background plant or machinery within a building)

Special rate assets include integral features of buildings and structures, solar panels and assets with an expected life of at least 25 years.

The balance of the expenditure, after the special rate allowance has been claimed, can be added to the special rate pool in the following accounting period.

Companies will be liable to a balancing charge if they sell an asset for which a 50% special rate allowance has been claimed. For example, if a company incurs £100,000 expenditure, claims a 50% special rate allowance of £50,000 in the first year, pools the balance of £50,000 in the second year in the special rate pool, then sells the item for £80,000 in the third year, the company will be liable in the third year to a balancing charge of £40,000, 50% of the £80,000 disposal value. The remaining £40,000 of the disposal value is applied to the special rate pool to reduce the balance in that pool. This will result in an additional balancing charge if the pool is reduced to less than zero.

Check if you can claim super-deduction or special rate first year allowances.

Annual investment allowance (AIA)

If you bought business equipment, you can claim an AIA to use against your net profits for the year you bought it. You cannot claim AIA for the cost of cars or for items you received as a gift, or for items you bought for another reason before you started to use them in your business.

Trustees or partnerships not made up entirely of individuals cannot claim the AIA.

To claim AIA:

• add the cost of the item to the appropriate pool
• work out the amount of AIA you can claim
• take away the AIA from the amount you added to the pool

Writing down allowances

Writing down allowances help you reduce (write down) the balance of your pooled costs. The 2 rates are:

• main pool rate — 18%
• special pool rate — 6%

For a single asset pool apply the rate of the pool the asset would be in, if it were not in a single asset pool. For example, a computer would be main rate and a car with higher CO2 emissions would be special rate.

Claiming the writing down allowance

Start with any balance left in the pool from the year before:

• add the costs of any items you bought, exclude all expenditure for which you have claimed a first-year allowance
• if you had claimed a first-year allowance in the previous year you may add the balance, for a 100% first-year allowance the balance will be nil
• take away the amount of AIA you have claimed in the year
• take away the amount you got for any items you sold
• take away the market value of any items your business stopped using and which you kept for yourself

This will give you your new pool balance. You can now claim the WDA. This is 18% of the balance in your main pool or 6% of the balance in your special rate pool.

Small pools allowance

You can write off all the balance in your main pool or the special rate pool when your pool’s value is £1,000 or less before you work out the WDA. This is called a small pools allowance. You claim this instead of claiming a WDA.

Capital allowances and cars

There are special rules for claiming capital allowances on the cost of cars. If you bought a car on or after 6 April 2009, the allowance you claim depends on your car’s CO2 emissions and when you bought the car. See your V5 certificate or go to carfueldata.direct.gov.uk/carfueldata.

Read Business cars for more information.

Short and long-life assets

Short-life assets

You can choose to put the cost of an item into a single, short-life asset pool rather than the main pool. If you buy lots of things together, such as glasses or cutlery, you can add together all the expenditure you spent in a chargeable period on those items and put it in to a short-life single asset pool. Short-life assets do not include:

• cars
• assets used partly for private use
• items in the special rate pool, including integral features

You work out allowances separately, each year, for items in single asset pools. If you have not disposed of an asset in a short-life asset pool after 8 years, you close the short-life asset pool and transfer the balance in it to the main pool. You do this by taking away an amount equal to the balance in the short-life asset pool so reducing the balance to nil. You then add the same amount to your main pool.

If you sell or dispose of an asset that’s in a short-life asset pool before the end of 8 years you will have a balancing allowance or a balancing charge. If you want your asset treated as a short-life asset, you need to tell HMRC in writing by one year after 31 January following the end of the tax year for the period of account in which you bought the item if you pay income tax, or no later than 2 years after the end of the accounting period if you pay corporation tax. You cannot change your mind once you have told us.

Example

You are self-employed and you buy a computer in your period of account ended 5 April 2022. You must let HMRC know by 31 January 2024 that you want this treated as a short-life asset.

Long-life assets

These assets are plant and machinery which have an expected business life (when new) of 25 years or more. ‘New’ means unused and not second hand. You normally put long-life assets into the special rate pool. If your business is your full-time occupation and you spend £100,000 or less on long-life assets, you put the cost into the main pool.

Assets leased out

You can claim capital allowances if you lease out your assets to other users — but not first-year allowances. This does not include assets leased out on a hire-purchase or long-funding lease.

Fixtures

If you buy a property from another business, you can only claim allowances for fixtures such as kitchen fittings, electrical or heating systems, if the previous owner had put the costs for the fixtures in a pool and if you both agree how much of the total amount you paid for the property relates to the fixtures, usually by making a joint election under section 198 of the Capital Allowances Act 2001.

If you’re thinking of buying, selling or leasing a business property that capital allowances may be available for, you may wish to contact your tax adviser.

Disposals

When you sell something that you claimed plant and machinery allowances on (including AIA or a first-year allowance) you usually deduct the amount you get for selling it from the balance in your pool before you work out the allowances you can claim for that year.

You also make a deduction if you stop using the item in your business for whatever reason. The amount you deduct depends on why you stopped using it. If it was lost or destroyed, you deduct the amount you receive from any insurance payments and any other compensation. If you kept it for yourself or gave it to a family member you deduct the market value.

There are special rules for disposals of assets by companies that have claimed the super-deduction or 50% special rate allowance. Disposing of a super-deduction or special rate first year allowance asset.

Balancing charge

If you sell an item you claimed capital allowances for, and the sale or value of the item is more than the balance in the pool, you add the difference between the 2 amounts to your net profits. This is a balancing charge. You will have a pool even if you have claimed AIA on all your costs or a 100% first-year allowance. The balance in the pool can be nil.

If you sell an asset for which you claimed AIA or first-year allowances, and your pool has a zero balance, the amount you sell it for or its market value if you give it away or use privately, is the balancing charge.

If a company sells or disposes of an asset for which it has claimed the 130% super-deduction or 50% special rate allowance, a balancing charge will always arise. Disposing of a super-deduction or special rate first year allowance asset.

Example

If you buy a van for £10,000 and sell it 3 years later for £4,000 the net cost to you was £6,000. If you claimed £10,000 AIA when you bought the van you will have had more allowances than the net cost of it to you, so you have to adjust your allowances when you sell the van. You do this by taking £4,000 off the balance in your pool before you work out the writing down allowances.

If the balance in your pool is more than £4,000 this will reduce the amount before you work out your allowances for the year. If the balance is less than £4,000 you will have a balancing charge equal to the difference between the balance and £4,000. For example, if the balance is £500 the balancing charge will be £3,500, which is the difference between £4,000 and £500.

If the balance in your pool is nil, for example because you have claimed AIA on everything that you have bought, you will have a £4,000 balancing charge that is added to your net profits.

Balancing allowance

If your business stops trading, you can claim any balance left in the pool after you take away the amounts you get for selling the relevant assets, or the market value of things you don’t sell, as a balancing allowance.

You take balancing allowances off your net profits. You only get a balancing allowance in the main or special rate pool when your business ceases. You can get a balancing allowance in a single asset pool at any time, when you sell or dispose of the asset that is in it.

Chargeable periods and capital allowances

Corporation tax

For corporation tax the chargeable period is the accounting period. An accounting period cannot exceed 12 months, but it can be shorter.

Accounting periods less than a year

If your accounting period is less than a calendar year, you proportionally reduce the amount of AIA, small pools allowance and writing down allowance you claim.

For example, if the AIA limit is £1,000,000 and your accounting period is 6 months, the maximum AIA you can claim is £500,000 (6 ÷ 12 × £1,000,000).

This does not apply to first-year allowances.

Income tax

For income tax the chargeable period is the period of account. A period of account can be longer or shorter than 12 months.

Periods of account less than a year

If your period of account is less than a calendar year, you proportionally reduce the amount of AIA, small pools allowance and writing down allowance you claim.

For example, if the AIA limit is £1,000,000 and your period of account is 6 months, the maximum AIA you can claim is £500,000 (6 ÷ 12 × £1,000,000).

This does not apply to first-year allowances.

Periods of account longer than a year but less than 18 months

If your period of account is more than a calendar year but less than 18 months, the maximum AIA, small pools allowance and writing down allowance you can claim is proportionally increased.

For example, if your period of account is 17 months, your small pools allowance is £1,417 (17 ÷ 12 × £1,000).

This does not apply to first-year allowances.

Periods of account longer than 18 months

If your period of account is longer than 18 months, you need to split this into 2 periods:

• a 12-month period
• any remaining balance — up to 12 months

Gaps and overlapping periods of account (income tax)

If there is a gap between your periods of account, you need to add the gap period to the end of the year of the first period of account.

If two periods of account overlap each other, add the overlap part to your first period of account.

If you need further advice

Contact us for advice on Self-Assessment.

Find more guidance about capital allowances.