Capital Allowances Explained – How Do They Work?

The following illustrative example shows how capital allowances work in practice.

A profitable company is paying tax at the full 28% corporation tax rate. It buys some land with an office on it for £1 million. In the same accounting period it spends £75,000 decontaminating the land and a further £800,000 refurbishing the building.

A specialist capital allowances review identifies the following tax-deductible expenditure:

• Office acquisition: £225,000 of the purchase expenditure qualifies for Plant & Machinery Allowances (“PMAs”). Of this £90,000 is 'normal' plant qualifying for tax relief at 20% per annum and the remaining £135,000 is 'integral features' plant qualifying at 10%
• Office refurbishment: £450,000 qualifies for PMAs. Of this, £170,000 is 'normal' plant, £255,000 is 'integral features' and the remaining £25,000 qualifies for immediately tax-deductible 100% Enhanced Capital Allowances (“ECAs”).

The specialist capital allowances analysis will save the company £220,500 of tax (£63,980 in the year the money is spent and a further £156,520 over following years). And of course, the saving resulting from capital allowances would be even greater for a private investor paying tax at 40%.

EXTRA TAX SAVED BY CLAIMING PROPERTY TAX RELIEFS:
First Year Tax Saving:
Tax payable if no claim is made (see working below)		£518,000
Less tax payable having claimed (see working below)		(£454,020)
First Year Tax Saved by Claiming		£63,980
Total Tax Saving Over Time by Claiming:
Total tax saving over time £787,500 x 28% tax rate		£220,500
Less first year tax saving (see above)		(£63,980)
Remaining Tax Saving (to be enjoyed in future years)		£156,520
WORKING - CALCULATION OF TAXABLE PROFIT:
Profits per the accounts		£1,800,000
Add-back accounting depreciation (not tax deductible), say		£50,000
Chargeable profits (without claiming capital allowances)		£1,850,000
Tax on chargeable profits above would be	£1,850,000 x 28% = £518,000 tax
Less land remediation & capital allowances:
Land remediation (£75,000 x 150%)		(£112,500)
ECAs (£25,000 x 100%)		(£25,000)
PMAs 'normal' £260,000 x 20% annual ‘writing down allowance’		(£52,000)
PMAs 'integral features' £390,000 x 10% annual ‘writing down allowance’		(£39,000)
Year 1 reduced taxable profit (after claiming land remediation/capital allowances)		£1,621,500
CALCULATION OF TAX PAYABLE:
Taxable profit (see working above) of £1,621,500 x 28% tax rate =		£454,020