UK Accounting Glossary
Capital allowances is the practice of allowing a company to get tax relief on tangible capital expenditure by allowing it to be expensed against it’s annual pre-tax income.
A capital allowance is the amount of expenditure that a British company may claim against it’s taxable profit as laid out in the Capital Allowances Act. It is regulated by HM Revenue & Customs (HMRC).
Capital allowance is where a company is able to get tax relief on what is known as tangible capital expenditure by enabling it to expense it against the company’s pre-taxed income. Usually, capital allowances can only be gained on specific items of tangible capital expenditure, the expenditure is normally spread out over a period of years. Capital allowance is a term that is used in Ireland and the UK.
Under the Irish Capital Allowance scheme, you are able to get tax relief on both tangible and intangible assets which can the be expensed against pre-tax income in Ireland. This is part of what makes Ireland so attractive for American companies to operate in, as it has allowed these multi-nationals to pay <3% in corporation tax in Ireland, which in 2015 is exactly what Apple did, this is also known as leprechaun economics.
Capital allowance is not the same as depreciation which is not admissible for tax relief. In the event that capital expenditure is not able to qualify for Capital Allowance, then the company will not be in receipt of tax relief for said expenditure.
The company may claim capital allowances when the obligation to pay for the cars has become unconditional.
Businesses are able to claim capital allowances for expenditure on machinery and plants, these can then be taken away from corporation tax on the profits the company has made.
From May, businesses will be able to claim the full purchase price of electric cars against tax under the new capital allowances scheme.
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This glossary post was last updated: 8th May 2019.