What is Capital Allowance?
Posted by karenh on 23 rd in Annuities, Purchase Annuity on 23rd of August 2011Capital allowance is the deduction available to UK tax payers while computing taxable income. In UK, depreciation is not an allowable expense and its place is taken by capital allowance.
Both depreciation and capital allowance become applicable when you buy long-term assets for business purposes. Buildings, plant & machinery and furniture are examples of such long-term assets. As these assets will be used over a number of years, you cannot write their costs off as expense in the year of purchase.
Instead, the typical solution is to estimate their useful life in years, and write off a proportionate amount each year over this life time. This is what we call depreciation. In UK, however, depreciation is not allowed as a business expense.
The capital allowance system also essentially allows you to write off the cost of assets over a number of years. However, the regulations regarding capital allowance is much more complex.
For example, in the case of buildings, the entire cost of the building cannot be the basis for claiming capital allowance. Instead, you have to segregate the cost into First Fix and Second Fix costs. Capital allowance can be claimed only for the Second Fix costs.
First Fix costs include costs up to and including plastering. Second Fix costs are all the costs after the plastering stage to final finishing. These actually include innumerable items such air-conditioning, electrical fittings (but not the wiring), water supply fittings (but not the piping) and so on.
Considering that you pay for the building as a whole, computing the Second Fix costs is a complex exercise requiring special valuation expertise. The result is that many businesses do not claim the capital allowances that they are entitled to, and pay significantly higher amounts of tax than they need to.
Accountants are not typically equipped to identify and value the borderline items eligible for capital allowances.
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