Capital Allowance
A UK tax deduction that allows businesses to write off the cost of capital assets against taxable profits.
Capital allowances are a form of tax relief that allows UK businesses to deduct the cost of qualifying capital expenditure from their taxable profits. Rather than deducting the full cost in the year of purchase (which is what the Annual Investment Allowance enables), the main capital allowance pool deducts a fixed percentage of the asset's remaining value each year (the writing-down allowance, currently 18% for the main pool).
For business finance purposes, understanding capital allowances is important when choosing between hire purchase and finance lease. Under hire purchase, HMRC treats the business as the owner, so capital allowances (including AIA) are available to the business. Under a finance lease, the lender retains ownership and claims the allowances - the business deducts the lease payments as a trading expense instead.
Capital allowances cannot be claimed on cars with CO2 emissions above certain thresholds (though electric vehicles attract 100% first-year allowances). Consult your accountant before making large asset acquisitions to understand the most tax-efficient structure.
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