Capital allowances are a type of tax relief for businesses, generated when an individual, company or partnership undertake capital expenditure. Lynn Wilson, Corporate Tax partner, AAB, discusses how business in Scotland can promote growth through capital allowances.
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Capital allowances are a type of tax relief for businesses, generated when an individual, company or partnership undertake capital expenditure. Often overlooked in property and construction projects, they are a powerful tool that can significantly reduce tax liabilities and strengthen investment in capital – intensive projects. These allowances enable businesses to offset the cost of these assets against their taxable profits, reducing their overall tax liability, and improving cash flow.
AAB’s Corporate Tax team specialise in capital allowance services tailored to the unique needs of businesses engaged in property development and large-scale construction projects. Our in-depth understanding of tax legislation, combined with our proactive approach to identifying eligible expenses, ensures that our clients maximise their tax relief.
Who can qualify?
There are specific criteria which determine the level of tax relief available on different types of capital expenditure and the annual rates of relief are between 3% to 100% of the capex spend.
When constructing a property to maximise capital allowances, there are key factors to consider. Firstly, it is important to identify, categorise and document the eligible costs incurred during the construction process. Doing this at an early stage of a build can help identify items that will qualify for more generous relief.
One of our clients is currently redeveloping a hotel and leisure site with an expected capital spend of around £40m. Working closely with them has resulted in more than 40% of the costs qualifying for tax relief at higher rates of capital allowances. The tax saving in the year of spend is expected to be over £3.5m.
When can I claim?
It is not uncommon for businesses to overlook potential tax relief opportunities, especially when it comes to older projects. However, with capital allowances, there’s no expiration date on claims. For example, one of our clients had acquired a property many years ago for around £500,000. Working with a quantity surveyor who specialises in capital allowances allowed the individual to go back and make a claim for the qualifying expenditure, saving Income Tax of around £22,000.
Being proactive and engaging with experts early can provide valuable guidance on cost segregation and asset identification. We collaborate closely with project teams, contractors, and quantity surveyors to ensure that eligible expenditures are actively identified and optimised throughout the claims process.
