In 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 profits of a trade chargeable to income tax or corporation tax because it is an item of a capital nature. See the Capital or revenue guidance note. ITTOIA 2005, s 33; CTA 2009, s 53
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. ITTOIA 2005, s 28; CTA 2009, s 48
Types of capital allowances
The rate of relief available depends broadly on the type of capital expenditure incurred and the date the costs are incurred.
The most common expenditure on which capital allowances are claimed are:
- plant and machinery, and
- integral features
This guidance note gives an introduction to capital allowances.