Capital allowances for hotels are available for construction costs in respect of a qualifying hotel or hotel extension. Writing down allowances (WDA) were reduced from 2008-2009 and were withdrawn completely from April 2011.
However, enterprise zone hotels which are qualified for enterprise zone allowances on buildings continue to receive such allowances with no restriction on months of opening or number of rooms, etc.
For all the cases listed above there are detailed rules governing which type of asset qualifies. In no case are allowances due on the cost of land or interests in land.
A “reducing balance” allowance is one where the percentage is applied each year to the remaining balance of unrelieved expenditure. For example, if a taxpayer spends £1,000 on plant or machinery, he normally gets 25% of £1,000 (£250) in the first year.
In the second year he gets 25% of £750, which is £188; and so on. A “straight line” allowance is one where the allowance is the same every year until the expenditure has all been relieved.
For example, if a taxpayer has spent £1,000 on an industrial building, he would normally have been allowed a fixed allowance of £40 each year for 25 years (4% each year for 25 years).
An allowance of 100% is available for expenditure incurred on constructing industrial and commercial buildings in a few, fairly small, parts of the UK called enterprise zones under a contract entered into during the life of the zone.
These zones have a life of ten years and most have now ceased. Not only is the rate of allowance very high (100%) but it is due on a wider range of assets.
That is, not only do industrial buildings and structures and qualifying hotels get the 100% allowance but also certain commercial buildings and structures (like offices and shops).
Capital allowances are not due on the cost of houses, flats and other residential accommodation apart from agricultural buildings allowance. Nor are they due on most kinds of commercial building outside enterprise zones, including shops and offices.
Some warehouses may qualify for industrial buildings allowance and some will not, it depends on the exact nature of the use.
A flat conversion allowance was introduced as announced in the 2011 Budget. It is intended to encourage the conversion of empty or underused space above shops and other commercial premises to residential use.
Allowances for plant and machinery (such as cars or vans) are subject to the “wholly and exclusively” rule. Allowances on cars costing more than £12,000 are restricted.
There are higher allowances for environmentally beneficial and energy-saving plant and Machinery.
It is important to remember that there are different types of allowances. In some cases a claim can be made for the full cost of an item as a deduction in the year of acquisition. In other cases a claim can be made for all of the expenditure on various items in the year they are acquired.
The allowance may have to be worked out as a percentage of the value in a pool of expenditure. The allowance is deducted along with other expenses in calculating profits.
If an item is used partly for non-business purpose, it will be necessary to work out the allowance for that item separately. A claim can then be made for the amount that relates to the business use.
Expenses must be allocated for the relevant year, regardless of when actual payment was made.
However, in relation to capital allowances, it does matter when the cost of an item is payable. In this regard, it may be necessary to allocate part of the cost to one year and the rest of the cost to another year.
Industrial Buildings and Structures
IBS covers factories as well as a range of other types of building. However, the allowance of 4% on a straight line writing-down basis was phased out in 2011-12. Therefore, no allowances are available for chargeable periods beginning on or after 6 April 2011.
The 4% straight line writing-down allowance for Agricultural Buildings and Works (ABS) was phased out in 2011-12, as in the case above.