Helping businesses understand the capital allowances available

Accountants play a crucial role supporting businesses in financial distress. Here are some of the allowances they’re utilising.

Huge numbers of UK businesses are believed to be in financial distress. Nearly 600,000 face significant difficulties and 47,000 are on the ‘brink of collapse’, according to a recent Red Flag report by insolvency specialist Begbies Traynor.

Health and education, construction and property sectors are among the hardest hit. The number of struggling businesses within health and education increased by 41% at the end of 2023, 33% in construction and 25% in property.

This doesn’t paint a particularly encouraging picture for the coming year. The situation underlines the crucial role accountants can play in providing value-add support and expertise for their clients. Claiming tax relief for eligible capital expenditures on business assets such as plant, machinery, equipment and buildings can reduce a business’s total taxable income. 

Here are a few capital allowances that are currently available to eligible businesses:

Annual investment allowance (AIA): Businesses investing in plant and machinery qualify for a full tax reduction for eligible expenditure. The maximum a company can claim as per annual investment allowance has now been permanently set at £1 million per annum.

100% first-year allowance: Businesses can claim the full amount of plant, machinery and equipment within the first year of purchase.

Temporary first-year allowance: Businesses can claim a super deduction of 130% of costs from pre-profit tax or use the 50% special rate first-year allowance to deduct 50% of costs from pre-profit tax. This applies to qualifying plant and machinery investments on expenditures incurred from 1 April 2021 to 31 March 2023.

Writing down allowance: This allows businesses to claim tax relief on eligible assets over a longer period and can be used if the business asset no longer or doesn’t qualify for other allowances.

Research and development allowance (RDA): RDA provides tax relief on costs relating to research and development.

Business Premises Renovation Allowance (BPRA): Businesses are entitled to a 100% tax credit on eligible costs relating to converting or renovating business premises in a disadvantaged area.

Audio-visual expenditure credit (AVEC) and video games expenditure credit (VGEC): AVEC and VGEC replaced previous Film, TV and Video Games Relief from January 2024. These two new schemes allow companies to claim credits based on eligible productions or video games expenditure (subject to a maximum cap) rather than via an HMRC tax refund. Relief rate is 34% for video games, film and high-end TV whereas the rate for animation and children’s TV is 39%.

But how aware are businesses of these types of capital allowances and are they taking full advantage of them? We spoke to accountants to find out.

Businesses struggle with complexities of capital allowances

Carmen Morrison, Senior Consultant, Capital Allowances Tax Analysis, Ryan

Many businesses struggle to claim all the capital allowances available to them due to the specialist nature of the tax area and legislative criteria that must be met within specific time limits.

Capital allowance is a form of tax relief that often gets missed or underutilised when ensuring tax efficiency. We find capital allowances are normally claimed on expenditure that occurs on ad hoc/day-to-day capitalised expenditure within the business. But on big projects such as construction, property refurbishment or purchase, capital allowance is often missed.

The two main rates of capital allowances are:
Main Rate Allowance: allowing expenditure to be written down at 18% per annum
Special Rate Allowances: allowing expenditure to be written down at 6% per annum.

These can also be deducted from profits at 100% in the year the expenditure was incurred, as long as the expenditure is analysed as soon as possible due to strict timelines for Annual Investment Allowance and/or Full Expensing.

I’ve also been encouraging clients to make use of:

• Super Deduction: Companies can claim 130% capital allowance on qualifying plant and machinery investments on expenditures incurred between 1 April 2021 and 31 March 2023.
• Annual Investment Allowances and Full Expensing: the taxpayer can claim 100% deduction in the year of expenditure and 50% First Year Allowances for Special Rate Expenditure.

Verdict: Businesses struggle to understand capital allowance availability due to specialist and complex nature of the tax area – but there are many avenues I encourage clients to explore.

Capital allowances essential to survival of small businesses

Ellis Harris-Boulter MAAT, Founder and Director, FieCo Accountancy & Marketing and AAT Tutor

We’re seeing increasing signs of economic strain, particularly on cash flow, across a range of industry sectors. This is reflected particularly through credit control with worsening collection trends and increased irrecoverable debt, and what appears to be a contracted job market.

The generous 130% super deduction introduced in 2021 demonstrated the power of policy on investment. Despite this relief ending on 31 March 2023, the fact that full expensing has been made permanent will be reassuring to many businesses.

Verdict: the importance of ensuring clients, particularly small businesses with limited cash flows, understand the allowances available to them cannot be overstated.

Overlooked allowances can make quite a difference

Marie Hensfield, AAT-qualified accountant, Sherwin Currid Accountancy

Struggling businesses cannot afford to overpay tax. It is really critical that their accountant maximises the amount of tax relief they can legitimately claim on their tax return.

But many small businesses aren’t aware of the tax reliefs available to them, particularly if they buy equipment and vehicles when they’re first getting started. Self-employed individuals and director-shareholders of limited companies rely on their accountants to let them know how they can take advantage of these capital allowances to reduce their tax bills.

Helping clients with the timing of capital purchases and how this will affect their tax liabilities is also important, as small businesses often have cashflow constraints.

Lots of our clients in particular weren’t aware of the Super Deduction capital allowances until we pointed these out. We have helped clients save thousands with this. The Structures and Buildings allowance is another one which often goes under the radar – at 3% per year, this can add up if overlooked.

Verdict: The Super Deduction capital allowance and the Structure and Buildings allowance are often overlooked but can make quite a difference to businesses.

There needs to be more information and education to help businesses utilise capital allowance schemes

Claire Bartlett, Director, Arden Bookkeeping

I am seeing my clients struggle financially much more now. I believe it is only now that businesses are really feeling the effect of Covid; during the pandemic there was so much financial support available, but now businesses are having to repay that support while facing increased overheads and less spending in the economy.

None of my clients are aware independently of what is available to them through capital allowance schemes. It is up to us as professionals to advise and support them. There is not enough information available to the general public about capital allowances and how they can be utilised.

I feel much more education is required around this tax scheme to ensure as many businesses as possible are benefitting from capital allowances like the super deduction. The economy is incredibly tough right now and small businesses need as much support as possible to help them navigate this difficult period in business.

My client base is made up of micro and small businesses. Although the capital expenditure they can claim is small, utilising the super deduction has made and is making a big difference.

Verdict: More information and education is needed to help businesses understand and utilise capital allowance schemes.

Would you like to contribute to future articles like this one? If so, please get in touch with Annie Makoff-Clark at [email protected].

Annie Makoff is a freelance journalist and editor.