Capital allowances: HMRC’s big gift to small companies

While many businesses claim capital allowances on items such as computers, phones and cars, they could be missing out on substantial tax relief available to them in claims on other “plant and machinery” items that are embedded in their commercial property. 

When added up, the savings in tax relief on plant and machinery claims often come in at over 30 per cent of the purchase or construction price of the property in which they are found. 

Most commentators agree that over 90 per cent of commercial properties in the UK have unused claims within them. Taken together, the potential savings through tax relief can be huge and are likely to be available to a huge number of businesses.

Let’s look at “plant and machinery” in a little more detail. “Machinery” is rather self-explanatory, covering mechanical items used by the business. “Plant” items, however, are a little more interesting and often a lot less clear. 

In simple terms, plant items that can generate tax relief are “apparatus used for carrying on a business”. Items such as fans, generators and radiators generally fall into this category, but the complex web of rules and case law that makes up the capital allowances regime means that the definition is in no way exhaustive. 

The items that people have claimed tax relief on are varied, sometimes unusual and often surprising; examples include mirrors, fish tanks, statues, CCTV systems, zoo cages and artwork. One person has even tried to claim on a horse! 

SMEs often own shops, hotels, factories and offices – all of which are prime examples of properties with a large amount of plant and machinery. If your business sounds like this, then the chances are good that you will be eligible to claim a sizeable amount of tax relief.

It is no surprise that the take up rate for SMEs has so far been so low: big accountancy and law firms are well aware of these capital allowances and have developed specialist service lines through which they claim for international clients on a regular basis. Smaller enterprises however don’t have access to the same expertise, which is a shame, as £50,000 or so claimed in tax relief through capital allowances can make a much bigger difference to the margins and fortunes of an SME that it can for the likes of Tesco. 

Claims on plant and machinery that is purchased with a building can only be made once in that building’s lifetime. As mentioned briefly above, full claims have not yet been made on over 90 per cent of the UK’s commercial properties, but other avenues exist for those whose buildings have already had capital allowances claims on them. 

Few people realise for example that a proportion of the money spent on maintenance, refurbishments, alterations, extensions and new installations can also be claimed back against your company’s profits to reduce your tax bill. 

The capital expenditure on the design, project management or cost control or for the specialist costs of installation of a specific item of plant or machinery can all be taken into account for capital allowances; it is not just the cost of the item itself which is eligible. This is not widely known but represents a further source of valuable tax relief for SMEs.

Companies wishing to maximise the relief that they are entitled to should keep detailed records for building works on these projects and receipts for services paid for which more specifically detail the works involved. 

Acting quickly is advised for SMEs that want to take full advantage of capital allowances, as legislation that came into effect this month has effectively introduced a time limit for making claims. 

While the outlay for identifying, recording and claiming these allowances can seem like an obstacle, the tax relief that can be recouped often makes it more than worth it. Just as an example, expenditure of £100,000 on a hotel can typically generate £35,000 worth of tax relief. These bonuses are HMRC’s big gift to small companies, and they are there to be claimed.

Jeanette Edmiston is technical manager at Portal Tax Claims.

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