History of Capital Allowances

The early years – the origin of the current capital allowance regime was a wear and tear deduction based on the actual reduction in the value of plant or machinery which was introduced in 1878. We have come a long way since then, firstly with the “Income Tax Act of 1945” which introduced a system of capital allowances to encourage post war reconstruction, establishing concepts such as initial allowances, WDA’s, balancing allowances and charges. At this time WDA’s for P&M were set at 25%.

The Reforms of 2008 – introduced AIA’s at 100% which replaced the previous 40% or 50% FYA’s and integral features which resulted in the special rate pool for items classed within the Capital Allowances Act 2001 (CAA01) as Plant & Machinery (P&M) and as such attract capital allowances.

Changes post 2008 – saw rates for the main and special rate pools reduced to 18% and 8% respectively for the chargeable periods ending on or after 1 April 2012 for companies and 6 April 2012 for businesses within the charge to income tax.

The Finance Bill 2012 – For purchases from April 2012, where any seller had claimed capital allowances but a joint election was not possible the seller must have confirmed the disposal value of the fixtures in a written statement within 2 years of the date of the sale. This was termed “the disposal value statement requirement”.

April 2014 – Mandatory Pooling meant that any seller who could have claimed capital allowances must have pooled the expenditure on the fixtures by the time that the tax return is finalised for the year in which the property was sold and that failure to satisfy the pooling requirement will result in the qualifying expenditure incurred by the buyer being deemed as nil.

It therefore follows that if the seller doesn’t take actions to identify/recognise the value of capital allowances then they will be lost. For any commercial property owner that has not fully utilised their capital allowance entitlement, a pooling exercise is absolutely essential to protect their right to claim.