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Expenses incurred in a business are either capital or revenue expenditures. Revenue expenses are normally expensed for repairs, for example, repainting walls. Whereas capital expenditure is usually expenditure on items which provide an enduring benefit for trade. This expenditure is usually not deductible from trading profits, so a measure of tax relief is received in the form of Capital Allowances. which is essentially a tax incentive to invest in plant and machinery. This Government incentive reduces taxable profits by claiming tax relief on certain types of capital expenditure (i.e. plant and machinery) to reduce taxable trading profits.

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Capital Allowance Scheme

What are
Capital Allowances?

Expenses you incur in your business can either be revenue (trading) expenses or capital expenditures. Normally, if an item will have a lasting benefit for the business, certainly longer than a year, it will be classed as capital expenditure. 

Capital allowances are a way of obtaining tax relief on some types of capital expenditure. They are treated as another business expense and so reduce your taxable profit within your basis period. 

Capital Allowances Explained

Does all capital expenditure qualify for capital allowances?

No. The expenditure must be on a particular type of asset. Generally, you must own the asset on which the capital allowances are claimed. In other words, if you have hired or leased the asset, capital allowances may not be claimed, but you may obtain tax relief on the rental costs as revenue expenditure.

There are special rules relating to assets acquired on hire purchase or finance leases. Generally, these assets are treated as belonging to the person using them, even though legal ownership may not pass until final payment is made at the end of the contract term. In order to claim capital allowances, these assets must have been brought into use. Any interest on hire purchase items is a revenue (trading) expense and not part of the capital expenditure.

Capital Allowance Relief Qualifications

How do I find out what types of expenditure qualify?

Here, we are only going to look at plant and machinery allowances but you can find out about other types of allowances at GOV.UK.

The most common assets which you may purchase and that will qualify for capital allowances are as follows:

  • Motor car

  • Van

  • Computer, printer, etc

  • Tools, for example, lawnmower, saw, etc

  • Specialist machinery

The main items that will not attract capital allowances include the cost of buildings or property, although it is possible that part of the cost of the building might relate to integral features or to fixtures. Note that you will only be able to claim capital allowances relating to a building if it is not a residential property (unless it's a Furnished Holiday Letting) and the property is used for business purposes, for example, if it is an office or a shop.

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