What is capital allowance in taxation?

Asked By: Bella Waguet | Last Updated: 26th April, 2020
Category: personal finance personal taxes
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Capital allowances is the practice of allowing a company to get tax relief on tangible capital expenditure by allowing it to be expensed against its annual pre-tax income. If capital expenditure does not qualify for a capital allowance, then it means that the business gets no tax relief on such expenditure.

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Accordingly, how are capital allowances calculated?

A capital allowance is the HMRC or tax equivalent of depreciation. For example, a business buys a machine for £10,000 and believes the machine has an estimated useful working life of 10 years. Capital allowances are HMRC's was of making tax fair and equitable when it comes to calculating taxable profits.

Secondly, what are capital allowances on tax return? Self-employed: writing down allowances. The 'writing down allowance' can be used if you've spent more than your annual investment allowance limit of £200,000 on capital assets, or if the item doesn't qualify for AIA (eg. cars, gifts or items you already owned before you started using them in your business).

Keeping this in consideration, what is capital allowance in Nigeria taxation?

Definition. Capital allowance in Nigeria is a claim against the assessable profits of a company. It spreads the tax relief for the cost of a qualifying capital expenditure (QCE) over some years. A company cannot reduce its taxable profits with depreciation expense and capital allowance.

Is capital allowance an expense?

Capital allowances are akin to a tax deductible expense and are available in respect of qualifying capital expenditure incurred on the provision of certain assets in use for the purposes of a trade or rental business. They effectively allow a taxpayer to write off the cost of an asset over a period of time.

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What qualifies for capital allowances?

Capital allowances can only be claimed on plant and machinery that is owned by the business – items that are leased do not qualify. The following are also excluded: Structures (including bridges, roads, and docks) Gates, doors, and shutters.

How much capital allowance can I claim?

Under these rules, you can spend up to £200,000 on qualifying, business-related expenses during the relevant period, and offset this spend against your income tax bill. Expenditure over £200,000 is then subject to capital allowance rates.

How long can you claim capital allowances?

A capital allowance claim for an accounting period may be made, amended or withdrawn at any time up to 12 months after the filing date for the company tax return for the accounting period. This means that in most cases the time limit is 2 years after the end of the accounting period (FA98/SCH18/PARA82).

What is the difference between capital allowance and depreciation?

Capital Allowance is something that the United Kingdom allows companies to deduct from pre-tax profits based on the type and amount of investment it does. Depreciation is the loss of net worth of certain fixed assets of a business because these assets have zero value after it reaches a particular life time.

How many years can you claim capital allowances?


A capital allowance of 12.5% a year for eight years may be claimed for spending on plant and machinery; motor vehicles; transmission capacity rights; computer software; and such specified intangible assets as patents, copyrights, trademarks, and know-how.

Can I claim mileage and capital allowances?

The rate also covers depreciation of the vehicle i.e. it's loss in value over time. You can't make additional claims for any of these things. If you have claimed the cost of the vehicle through your business via capital allowances, then you can't use the mileage method and must use full cost method instead.

How do you calculate capital allowances and balancing charges?

The tax written down value is the amount you bought the item for, minus any capital allowances you claimed. To calculate the balancing charge, add the amount you sold the item for to the capital allowances you claimed, then subtract the amount you originally bought the item for.

What allowances can I claim?

Claiming allowances
The W-4 is based on the idea of "allowances." The more allowances you claim, the less money your employer will withhold for taxes. You get one allowance for yourself, one for your spouse and one for each dependent you report on your tax return.

What is annual allowance?

The annual allowance is a limit to the total amount of contributions that can be paid into a defined contributions scheme (like The People's Pension), as well as the total amount of benefits that you can build up in the scheme, for tax relief purposes.

What is residual expenditure?


Residual expenditure” means cost of asset less – (a) initial allowances; and. (b) annual allowances; or.

What is special initial allowance?

An SIA is a capital allowance which ranks as a deduction. It has the effect of reducing the taxable amount and therefore the tax due from a business. This incentive enables the business to retain more of its earnings which can then be re-invested to grow the business.

Why depreciation is not allowed as a tax deduction?

Accounting for assets and depreciation
Unlike valid expenses, which are 100% tax deductible, depreciation is treated differently. The company cannot obtain the tax relief on the depreciation charges. Instead the company can claim a 'capital allowance' on the cost of the equipment.

What are allowable and disallowable expenses in taxation?

An allowable business expenses are incurred only for the business s purposes or needs. This is usually phrased as wholly and exclusively spending or expenditure which are tax deductible. Disallowable expenses are expenses that are not incurred "wholly and exclusively" for business and trade purposes.

What is rural investment allowance?

RURAL INVESTMENT ALLOWANCE- This is granted to all capital expenditures incurred by companies established in rural areas in respect of providing a lacking infrastructural facility.

What is petroleum investment allowance?


Petroleum Investment Allowance (PIA): 10% as for oil. To benefit from the foregoing incentives, a company must invest in natural gas liquid extraction facility to supply gas in usable form to domestic gas utilization projects, including aluminum smelter and Methanol, MTBE, and other associated gas utilization projects.

Can you carry forward unused capital allowances?

Under section 305(1)(a), unused allowances are carried forward to be deducted from an individual's Case V income in future years; that is, unused allowances carried forward are deducted in charging the income to tax in that future period.

Is depreciation an allowable deduction?

An asset's depreciation can be an income tax deduction that allows taxpayers to recover the cost of property or assets they've purchased and “placed in service" in the course of their trade or business. A fixed asset is one that a business or firm will use to earn income.