View the related Tax Guidance about Balancing allowance
Capital allowances computations
Capital allowances computationsPlant and machinery allowancesThree types of allowance are available for expenditure on plant and machinery:•the annual investment allowance (AIA), which currently provides a 100% allowance for the first £1,000,000 of expenditure per year, see the Annual investment allowance (AIA) guidance note•first year allowances (FYAs), which also provide a 100% allowance for expenditure, but restricted to particular types of plant and machinery this includes full-expensing on new plant and machinery by companies, see the First year allowances guidance note, and•writing down allowances, which provide a percentage allowance of 18% or 6% per year (18% or 8% prior to April 2019)There is also a temporary super-deduction of 130% and FYA of 50% on qualifying new plant and machinery acquired between 1 April 2021 and 31 March 2023. For more details, see the Super-deduction and special rate first year allowance guidance note.In addition, balancing allowances and balancing charges may arise in some circumstances where assets are disposed of or the business ceases.To compute writing down allowances, balancing allowances and balancing charges, expenditure is ‘pooled’. The different types of pools are:•the main rate or general pool ― includes most types of plant and machinery where not included in other pools•special rate pool ― mainly integral features, see the Special rate pool and long life assets guidance note•single asset pools when there has been a short-life asset election, see the Short-life assets guidance note•single asset pools when assets are used by unincorporated businesses both for
Capital allowances ― overview
Capital allowances ― overviewDefinition of capital allowancesIn the broadest sense, capital allowances are a form of tax-approved depreciation. Depreciation, as calculated under GAAP, is not an allowable deduction in computing the chargeable profits of a trade because it is an item of a capital nature. See the Capital vs revenue expenditure guidance note. Instead, relief is given by treating the capital allowances as an expense to be deducted when arriving at the taxable trading profits. Likewise, any charges are treated as taxable receipts. In addition to traders (self-employed individuals, partnerships or trading companies), capital allowances can also be claimed by for expenditure incurred by property businesses and certain other qualifying activities. See the Capital allowances ― general requirements guidance note.Summary of rates ― capital allowancesThe following table summarises the main capital allowances available, the rate of the allowance and if relevant any important dates or points to note, for further details including any relevant qualifying conditions or restrictions see the relevant guidance note as linked in the table.It was announced at the Autumn Statement 2023 that the initially temporary first-year allowances for expenditure on plant and machinery incurred by a company in the period from 1 April 2023 which was due to end on 31 March 2026 will be made permanent. For main rate expenditure (which would otherwise qualify for a writing-down allowance at the main rate) the FYA is 100%. For special rate expenditure, the FYA is 50%.
Research and development tax relief ― capital expenditure
Research and development tax relief ― capital expenditureThis guidance note provides information on the relief available for capital expenditure on research and development (R&D). The Research and development (R&D) relief - overview guidance note provides an overview of R&D reliefs for revenue expenditure. The guidance note Capital vs revenue expenditure provides information on whether expenditure is capital or revenue in nature.It is important to note that, although R&D tax relief for revenue expenditure is not available to unincorporated businesses or individual hobbyist inventors, only to companies, the RDAs for capital expenditure are available for companies and unincorporated businesses, provided they are carrying on a trade.See also Simon’s Taxes B3.7 for further details.Relief for capital expenditureWhat is qualifying expenditure for RDAs?R&D for these purposes is defined as activities that fall to be treated as such in accordance with GAAP and that satisfy the conditions set out in the guidelines issued by the Business, Energy and Industrial Strategy (BEIS) (formerly the Department of Trade and Industry). Essentially, R&D that qualifies for the tax relief for revenue expenditure will also be R&D for capital allowances purposes (see the Definition of research and development guidance note for further details). In addition, R&D for capital allowances purposes also includes oil and gas exploration and appraisal. Expenditure on R&D will qualify for RDAs where it is capital in nature, undertaken directly by the company or on its behalf and incurred in relation to an existing or future trade. Where R&D is carried out on behalf
Transfer of business premises
Transfer of business premisesThis guidance note provides an overview of the key factors to take into account on the transfer of premises used for business purposes as part of a trade and asset sale. A wide range of potential tax implications need to be considered and the final treatment will depend upon a number of influencing factors such as the value of the property, the nature or use of the property, the capital allowances history and the availability of any reliefs for example. Links to more detailed commentary on these issues are provided below.For guidance on the tax implications of selling a business whilst retaining the business premises, see the Tax implications of trade and asset sale guidance note.Capital allowances ― fixturesBuildings usually contain items which are attached or placed permanently in the building, which are referred to as fixtures in the tax legislation. When the building is sold, such assets are also sold given that they cannot easily be removed. Examples of fixtures include:•lifts and escalators•heating, lighting and electrical systems•alarm systems•sanitary appliances, and hot and cold water systems•telephone and data installationsWhere fixtures change hands, an adjustment is needed to split the allowances between buyer and seller. The availability of capital allowances on these assets for the purchaser of the building will depend on whether the seller could have claimed capital allowances, the original cost of the fixtures and what disposal value has been brought into account on any previous disposal. In most cases,
Capital allowances for sole traders and partnerships
Capital allowances for sole traders and partnershipsSome aspects of capital allowances only apply to sole traders and partnerships, these are as follows:•private use of assets which qualify for capital allowances eg cars•capital allowances on know-how•capital allowances on patentsEach of these is detailed further below.Private use adjustmentsSole traders or partnerships may use assets for both business and private purposes. For example, it is common for a sole trader to have a car which is used mainly for business, but at the weekends or in the evenings, used for private purposes. If all the costs of running the car are paid for by the business, the tax computations must be adjusted to take account of the private use. Therefore, motor expenses in the profit and loss account are reduced for the private element of those costs.Likewise when considering the capital allowance computations, the capital allowance must be reduced by the private element. The private element is normally given as a percentage which is then applied to the computations. In practice, the private usage may need to be agreed with HMRC.This is only applicable where the car is owned by the sole trader or partnership. It is necessary to consider whether this is the case, or whether the car is in fact leased. See the Capital allowances on cars guidance note for further information.Private use adjustments never apply to companies. The director of the company might use a company car for their private purposes. However, this will not affect
Introduction to year-end tax planning for companies
Introduction to year-end tax planning for companiesIntroductionThis guidance note considers various aspects of year-end tax planning for large companies or groups. It is recommended that it is read in conjunction with the Chargeable gains planning, Group companies and Year-end tax planning ― international issues guidance notes so that as many relevant factors as possible are considered. See also ‘Key issues for in-house tax teams: a checklist’, by Chris Holmes, Mark Ellis, and James Egert, in Tax Journal, Issue 1511, 14 (27 November 2020).Other matters which could be relevant, depending upon the tax profile of the company, are:•whether deductions for expenditure on intangible fixed assets (IFAs) are being maximised ― see the What is an intangible fixed asset? guidance note•whether deductions for loan relationships are being maximised ― refer to the What is a loan relationship? and Taxation of loan relationships guidance notes•real estate investment trusts (REITs) ― for the advantages and disadvantages of this regime to companies in the property sector, see the Real estate investment trusts (REITs) guidance note•review of time limits for claims and elections ― see Simon’s Taxes D1.1345When undertaking any planning exercise, companies and their advisers should consider whether any relevant anti-avoidance provisions, Disclosure of Tax Avoidance Schemes and the General anti-abuse rule are likely to apply. See the Disclosure of tax avoidance schemes (DOTAS) ― overview and General anti-abuse rule (UK GAAR) guidance notes respectively. Commercial considerationsAny tax planning exercise should include modelling all changes to income and expenditure to
Income tax implications of incorporation
Income tax implications of incorporationThe Incorporation ― introduction and procedure guidance note summarises various tax implications of incorporating a business. This note provides further details of the income tax aspects which include:•closing year rules / overlap profits which are relevant prior to the basis period reforms•capital allowances•stock•loss relief optionsThese are covered further detail below.Closing year rulesThe incorporation of a business by a sole trader or partnership brings about a cessation of trade for income tax purposes. The closing year rules for basis periods will therefore need to be considered for incorporations in the tax years up to and including 2023/24, including relief for overlap profits, see the Basis period (old rules) ― closing years guidance note.Prior to the abolition of basis periods, if the overlap profits were significantly greater than current profits for an equivalent time period, the cessation of the trade could trigger a substantial loss for which no relief is available. Careful choice of cessation date could help with this issue.See Example 1 and Example 2 for illustrations of cessation planning.The basis period rules are abolished from 2024/25 and businesses will be taxed on a tax year basis, see the Tax year basis from 2024/25 onwards guidance note. All overlap profit will be fully utilised under the transitional rules for 2023/24 , see the Basis period transitional rules 2023/24 guidance note. Any balance of amounts which have been spread as transition profits will come into charge in full in the final tax year,
Short-life assets
Short-life assetsShort-life assetsA short-life asset is an asset with a predicted useful life of less than eight years. Certain assets are excluded from short-life asset treatment. These include cars and assets with partial non-business use. Expenditure within the special rate pool (integral features and long-life assets, see the Special rate pool and long life assets guidance note) is also excluded.If a business acquires an asset and does not expect it to last for more than eight years, the business can make an election to depool that asset. The effect of the election is that the asset is thereafter dealt with separately for tax purposes, ie the asset does not enter the general pool but instead requires its own separate capital allowances computation. There is
Outbound migration
Outbound migrationReasons for an outbound migrationMigration describes the situation when a company changes its tax residence. Some companies migrate from the UK overseas as a way of escaping UK taxation and taking advantage of lower tax rates that may be available in other jurisdictions.Alternatively, commercial factors may make it preferable for a company to be incorporated in the UK (for example, because the process of incorporation is faster and simpler in the UK than in many other countries) but be tax resident in another country, eg all the directors may be resident in that country.In either case, it is necessary to consider the tax position of the new company.The Government is currently consulting on whether or not to introduce a corporate re-domiciliation regime. Such a regime may, or may not, include provision for outward re-domiciliation. The consultation closed on 7 January 2022 and the response is expected to be published by HMRC in due course.See the Holding companies guidance note.Methods of outbound migrationThere are a number of ways in which a company can transfer its tax residence from the UK to another country.Company incorporated in the UK with no double tax treaty in place between the UK and the other countryThe company will remain resident in the UK because it is incorporated in the UK. If it becomes resident in the other country under the tax rules there, it will be treated as a dual resident company in the absence of a double tax treaty. Company incorporated in the
Own car or company car
Own car or company carThis guidance covers some ideas for tax planning for the provision of cars to owner-managers and their spouses / civil partners. Detailed rules regarding the taxation of company cars are covered in the Company cars guidance note in the Employment taxes module.For guidance on the VAT implications of purchasing or leasing a car through the company, see the Input tax ― buying and leasing cars and other vehicles, Input tax ― buying and leasing cars and other vehicles and Input tax ― motoring expenses guidance notes in the VAT module.HMRC provides a company car and car fuel benefit calculator.If an owner-manager or director uses their own car for business purposes, then they can be reimbursed by the company without incurring tax liabilities, provided, payments are made within the limits prescribed by HMRC. Alternatively, if they use a company car, they would pay income tax on the benefit received based on the level of the car’s CO2 emissions and its list price. The employing company will also be liable to Class 1A NIC on the benefit.The company will usually pay for ownership or lease of the car and most of the ongoing associated costs. Provided that these costs are made wholly and exclusively for the purpose of paying the owner-manager, they will be allowable deductions for corporation tax purposes. The company receives corporation tax relief for depreciation of company cars in the form of capital allowances. There may also be an adjustment to the company’s profits
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