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Common areas of error in claims for plant and machinery allowances (part 2)

Updated 20 May 2024

Many common errors in claims appear to arise because the claimant makes assumptions rather than fully checking the facts of the transaction leading to a claim. Fully checking the facts helps to show you have met your obligation to take reasonable care that your claim is correct.

For the purposes of these guidelines:

• ‘assets’ are to be read as items kept for long-term use in your business
• ‘acquire’ may be read as your business obtaining a qualifying asset for the purposes of a qualifying activity, this may be:
  • buying it
  • hire purchase arrangements
  • obtaining it by any other means
• ‘disposal’ may be read as the qualifying activity losing all or part of the use of an asset, this may be by:
  • selling the asset
  • it wearing out
  • being destroyed
  • any other event

You can not normally claim plant and machinery allowances for assets you lease from others. See the ‘Assets you lease from others and hire purchase arrangements’ section of this guidance for exceptions to this rule.

Qualifying expenditure

You must have incurred qualifying expenditure for the purposes of a qualifying activity to claim plant and machinery allowances. If your business has more than one qualifying activity, you work out capital allowances separately for each.

You cannot claim annual investment allowance (AIA), the super-deduction, full expensing, special rate (SR) allowances, or 50% first-year allowances on business cars. You may be able to claim a 100% first-year allowance or writing down allowances for expenditure on business cars.

There are rules on when you have incurred expenditure.

The general conditions are:

• the expenditure is capital expenditure on the provision of plant or machinery wholly or partly for the purposes of a qualifying activity that the person incurring the expenditure carries on

• the person incurring the expenditure owns the plant or machinery as a result of incurring the expenditure

Problems can arise when you decide to treat something as capital based solely on the accounting treatment. The facts and context of the expenditure must be checked against the capital expenditure tax rules. Construction projects are an area where significant errors are made. It is important to consider the facts and context of expenditure before treating it as capital or revenue.  

The Business Income Manual gives further information on what is capital or revenue expenditure. This can be a complex area and you may need to consult a tax adviser if you are uncertain whether expenditure is capital or revenue in nature.

The next step is to check if an asset is plant or machinery for your activity. Not all items held long term will be plant or machinery.           

Where the decision to treat something as capital expenditure or as plant or machinery has needed an analysis of the law, providing an explanation with your tax return may reduce the need for HMRC to contact you about the claim.  

Date expenditure is incurred

Qualifying costs normally include the costs of:

• acquisition
• transport
• installation of the plant or machinery

You can only claim a first-year allowance or the AIA for the period in which you incurred the expenditure. The date the expenditure is incurred, or is treated as incurred, might not be the same as the date when you acquired the asset.

There is a risk of making a claim for the wrong period if these two dates are in different chargeable periods. A chargeable period is usually the period of time covered by your accounts. For Corporation Tax this is your accounting period and for Income Tax it is your period of account.

Find more information about when capital expenditure is incurred.

Making assumptions about rights under contracts can be a cause of error. Take reasonable care to check the wording of the underlying contracts. This wording will determine when you are treated as having incurred the expenditure and when ownership of the asset is transferred to you. 

Milestone contracts

A milestone contract is where both of the following apply:

• the asset being constructed under the contract becomes the property of the purchaser as it is constructed
• payment becomes due as and when agreed stages of the work (milestones) are satisfactorily completed

These contracts are often found where there is a large-scale construction project for either:

• buildings
• major items of machinery or plant such as oil pipelines

For plant and machinery claims, the normal rule is that the expenditure is incurred on the date the obligation to pay becomes unconditional. In a milestone contract, payment normally becomes unconditional when an architect or engineer inspecting the work done issues a certificate.

If you already own the asset

Where a business already owns an asset for another purpose and provides it for a qualifying activity at a later date, then that later date is usually treated as the date the expenditure is incurred.

If your business has more than one qualifying activity, you work out capital allowances separately for each. If you stop using an asset for one qualifying activity and start using it for another, then you usually record that as a disposal of the asset for the first activity and an acquisition for the second. See the ‘If you have not bought the item’ part of this guidance to understand the value to record and the limits on claims that you can make.  

Apportioning claims

If an asset has some use that is not for the qualifying activity it must be put into a single asset pool. This allows you to work out the right allowances and charges.

Find out more about rates and pools.

There are rules if an asset is partly:

• provided for the use of director or employee
• used for business entertainment

There are also rules if:

• you use an asset partly for the qualifying activity and there is a significant reduction in the partial use of the asset
• you receive a partial depreciation subsidy to cover some of the costs of depreciation

Personal use

An area of error in Income Tax returns is a failure to identify non-business use of assets. Sole traders and partnerships should treat the business owners personal use of an asset as non-qualifying use. The asset should be added to a single asset pool. The claim to capital allowances must be reduced by the percentage of non-qualifying use.   

Assets you lease from others and hire purchase arrangements

HMRC receive some claims for allowances relating to leased assets that are incorrect.

You cannot normally claim plant and machinery allowances for assets you lease from others. This is because you do not own the assets. However, you may be able to claim for hire purchase and some similar arrangements, lease purchase contracts and right of use leases. You may also be able to claim for long funding leases. These arrangements can be complex, and you should take care with related claims. 

Hire purchase and similar arrangements

Normally, you must own the plant or machinery to claim allowances. An exception is where you buy an asset under a hire purchase or similar contract. This is an agreement where both of the following apply: 

• the person claiming allowances has incurred capital expenditure providing plant or machinery for the purposes of their qualifying activity
• the expenditure is incurred under a contract providing that the person shall or may become the owner of the plant or machinery on the performance of the contract

When these conditions are met you are normally treated as owning the asset at the time you have the benefit of the contract.

Where the option to buy an asset at the end of a lease term is for a price at or above the market value of the asset, then the periodical payments that are due to be made during the lease term will not include any element of capital. Plant and machinery allowances are only due in respect of capital payments. 

If you have acquired an asset under hire purchase or similar arrangements, then keep a note of the date on which you bring the asset into use for your qualifying activity. Tax law treats this date as the day you have incurred all capital payments yet to be made under the contract. The qualifying expenditure does not include interest or other charges.

There are special rules for the hire purchase of fixtures.   

Read more on hire purchase. 

Lease purchase contracts

The person buying the asset under the lease purchase contract (the lessee) is not treated as the owner of the asset during the duration of the contract unless that person would treat the contract as a finance lease in accordance with generally accepted accounting practice (GAAP). If capital expenditure is incurred under a lease purchase contract which does not meet this condition, neither the lessee nor the lessor (the person providing the asset) can claim allowances.

Right of use leases

The lessee is only treated as the owner of the asset if the contract would have been treated as a finance lease under GAAP, had the lessee been required to make that determination. Again, if this condition is not met, then the ownership condition is not met and neither party can claim.

 You may need to speak to an accountant about how GAAP applies to your circumstances.

HMRC’s business leasing manual explains lease accounting taxation with an emphasis on plant and machinery. You may need to speak to an accountant to understand lease accounting.

Assets for lease or hire to others

If you buy assets that are for leasing or hiring out to others, you may be able to claim AIA or writing down allowances. You cannot usually claim first-year allowances, including the super-deduction or full expensing.

The exceptions to this rule are:

• if you provide a service in which you make use of the asset, one example may be providing a crane with an operator
• if it is an excluded lease of background plant or machinery for a building

In these cases, you may be able to claim first-year allowances including:

• the super-deduction
• SR allowance
• full expensing
• 50% first-year allowance

If you have not bought the item

The business may acquire plant and machinery as:

• a gift
• an asset brought into use for the qualifying activity after being acquired for another purpose

For these items you cannot claim:

• the super-deduction
• full expensing
• any other first-year allowance
• AIA

You may be able to claim writing down allowances. 

Where the plant and machinery is not bought for a monetary value, you usually use the market value at the time the asset is brought into use as the cost of the asset.

If you bring an asset you acquired for some other purpose into use for a qualifying activity and the market value is more than the cost of the asset, then the qualifying expenditure is the cost less any deductions that have to be made under the anti-avoidance rules.

There are special rules if you have been using an asset for leasing under a long funding lease and stop using it for that, but continue to use it for the purposes of a qualifying activity. 

New claims on old assets

You may find you have not claimed plant and machinery allowances for qualifying expenditure on assets you previously acquired. If you still own the assets, then it may be possible to pool the qualifying expenditure and claim writing down allowances. HMRC may disallow your claim if there is not enough evidence of the expenditure or if it is not clear that no prior claim has been made.

Find out more information about rates and pools.

You must be able to provide evidence in support of your claim. You cannot make estimates, such as claiming a percentage of the value of a property to represent plant and machinery within the property.

A good claim will usually need:

• a check of your records to ensure claims have not been made previously for the same expenditure
• identification of qualifying assets
• identification of special rate assets (see the special rate assets section of this guidance)
• a check of purchase records or other evidence of the cost of the asset and associated expenditure
• evidence that the assets remain in use in the qualifying activity

Claims may be restricted for fixtures in a building you acquired from someone else. More detail is in the fixtures section of this guidance.

Assumptions based on previous years or a sampling method 

HMRC may challenge claims for new acquisitions where the claim is based on a prior year’s claim or a sample of expenditure. There must be a proper check of the facts of the current claim. It is your responsibility to ensure your claim is correct.

Sampling is only acceptable as a method for preparing some claims for fixtures, and then in limited circumstances. For example, where expenditure is significant across a number of properties. If sampling is appropriate, you must use statistically acceptable sampling methodologies and discuss with HMRC prior to making a claim.

Buildings and structures

Business premises, structures, or settings will not usually be plant or machinery. Generally, these are not assets with which the business activity is carried on. They are the place or setting where the business activity is carried out. The fixtures section of this guidance tells you when you may be able to claim for expenditure on fixtures that are installed in a building.

You cannot usually claim plant and machinery allowances for:

• buildings
• land and structures, for example bridges, roads, docks

You may be able to claim structures and buildings allowance instead. If your claim treats assets that are building or structural type items as plant or machinery, then providing an explanation with your tax return may reduce the need for us to contact you about the claim. Your explanation should include your view of the law your conclusion relies on. This may help show that you have taken reasonable care to get your claim right.

Fixtures

You may be able to claim plant and machinery allowances for fixtures, for example:

• fitted kitchens
• bathroom suites
• fire alarm and CCTV systems

Read information on allowances for fixtures.

If you have incurred qualifying expenditure, you may be able to claim whether you rent or own the building.

To make a claim under the fixtures legislation you must meet all three of the conditions below:

• you have incurred capital expenditure on providing plant or machinery for your qualifying activity
• when installed in or otherwise fixed to a building, the plant or machinery becomes a fixture
• you have an interest in the relevant land at the time the plant or machinery becomes a fixture

Where you are part of a group of companies, you will need to consider which company has the lowest interest in the land and which company incurs the capital expenditure to find who has ownership, or deemed ownership, for capital allowances purposes. You can read a detailed explanation of these rules.

When fixtures change ownership

Usually the relevant expenditure on fixtures must be pooled by the seller prior to the change in ownership. The buyer and the seller must agree the value of the fixtures to allow the buyer to claim plant and machinery allowances on them. This is done by making a joint election. We recommend that you detail the agreed value in sale and purchase agreements, along with details of appropriate warranties and relevant elections.

More guidance:

• when there is a change in ownership of fixtures
• when acquiring a building that contains fixtures
• when a purchaser of land gives consideration for a fixture

Contributions

One person may contribute to the capital expenditure of another person. For example, a landlord may contribute to the costs of the expenditure of a tenant on fixtures. Read information on how to treat contributions. 

Assets in residential property

You cannot claim for expenditure incurred on plant and machinery for use in a dwelling-house if the qualifying activity is one of the following:

• an ordinary property business
• an overseas property business
• the special leasing of plant or machinery

A dwelling-house can be a building, or a part of a building. Its distinctive characteristic is its ability to afford to those who use it the facilities required for day-to-day private domestic existence.

HMRC view a house shared by multiple occupants, each with their own bedroom but sharing the other area of the property, such as the kitchen and dining area, as a single dwelling-house. This would not be the case for a block of flats, where the individual flats are the dwelling-houses. 

The plant or machinery does not have to be inside the dwelling-house to be ‘for use in’ it. For example, if a landlord installs ground-mounted solar panels within the garden of a dwelling-house he lets, and the electricity generated will be used in that house. Then the expenditure on the solar panels will not qualify for allowances. This is because, although the machinery is outside, its purpose is for use in the dwelling.

Read more information on what counts as a dwelling house

The government has announced that it will abolish the Furnished Holiday Lettings tax regime, eliminating the tax advantage for landlords who let out short-term furnished holiday properties over those who let out residential properties to longer-term tenants. This will take effect from April 2025.

Special rate assets

It is important to correctly identify capital expenditure that has been incurred on special rate assets. Expenditure on special rate assets must be pooled to a special rate capital allowances pool. Plant and machinery allowances for special rate assets are often given at a lower rate to main rate assets. Main rate assets are any asset that is not special rate.

Wrongly treating special rate assets as main rate may arise from a lack of fact checking, an incorrect assumption of useful asset life, or by relying on the accounting treatment. The facts should always be established before making a claim.

AIA gives 100% allowances on both main rate and special rate assets. Some first-year allowances for companies provide a 100% first-year allowance for main rate assets and a 50% first-year allowance on special rate expenditure.

For first-year allowances that are less than 100%, the balance of the qualifying expenditure is added to the appropriate pool in the following chargeable period and claimed as writing down allowances in later periods.

Read more information on rates and pools.

Example of special rate expenditure   

In May 2024 your company refurbishes offices it owns and occupies. You have already exceeded your AIA limit on other expenditure. You may be able claim 100% full expensing allowance for expenditure on new computers and some other new and unused office equipment, but the new electrical system to power these machines is an integral feature. This expenditure cannot be claimed at the main rate because integral features are one type of plant or machinery that attract the special rate of allowances. Instead, you may be able to claim the 50% first-year allowance for special rate expenditure. You may then claim the balance as writing down allowances in later periods.

The following are special rate assets

Integral features:

• lifts, escalators and moving walkways
• space and water heating systems
• air-conditioning and air-cooling systems
• hot and cold-water systems (but not toilet and kitchen facilities)
• electrical systems, including lighting systems
• external solar shading

Other special rate assets:

• business cars with CO2 emissions that exceed 50 grams per kilometre
• thermal insulation added to existing buildings used for a qualifying activity. This does not include dwelling-houses used in a property business unless it’s a qualifying furnished holiday letting business
• solar panels
• cushion gas in gas storage facilities

Most long-life assets are special rate

A long-life asset is plant or machinery which would reasonably be expected to have a useful economic life of at least 25 years when new. This means the total useful life from when the asset was first new, unused, and not second hand to when it can no longer be used as a fixed asset of a business by any person. It does not mean the useful life from when you acquired it or its useful life for your business alone.

HMRC may challenge a claim to main rate allowances on an asset if there is doubt over the method used to find it has a useful economic life of less than 25 years. The length of useful economic life must be based on a thorough check of the facts.

Monetary Limit

The monetary limit applies only to expenditure incurred by:

• companies
• individuals
• partnerships of individuals

It does not apply to trusts or to partnerships which have partners who are companies.

The general rule

Broadly, if your total spending on long-life assets in a 12-month chargeable period does not exceed £100,000 the long-life asset rules will not apply. The expenditure will not be special rate unless the law treats it as such for another reason. If qualifying expenditure on plant or machinery is not treated as special rate, then it is main rate expenditure.

The £100,000 threshold is reduced proportionately if your chargeable period is less than 12 months. It is increased proportionately for chargeable periods longer than 12 months . For example, a six-month chargeable period would result in a threshold of £50,000.

If you are part of a group of companies, then divide £100,000 by the number of companies with which you are associated plus one, to find your company’s threshold for a 12-month period. 

Example of a reduced threshold

A company is the parent of a corporate group that share the same 12-month chargeable period. There are five associated companies in the group, including the parent. The threshold for each of the five companies is £100,000 divided by 5 (the four other companies plus the one making the claim).

Depending on your circumstances, the general rule may not apply. You should check the detailed guidance on monetary limits before applying a limit as part of a claim.

Connected persons transactions

You should identify all transactions with connected persons. There are special rules for connected persons and HMRC see a number of errors. Restrictions may apply, including a restriction on the buyer’s qualifying expenditure for capital allowances.

If you acquire an asset from a connected person, then you cannot claim any of the following:

• the super-deduction
• full expensing
• any other first-year allowance
• AIA

These restrictions do not apply if all the following are true:

• the asset is new
• the seller’s business includes manufacturing or supplying assets of that class
• the asset is sold as part of the seller’s normal business

Example of when the restrictions do not apply

A man who runs an electrical store may sell a new computer from his stock to his sister in the same way as he sells to everyone. If his sister uses that computer for her trade and claims capital allowances for the cost of the computer, then the restrictions on allowances do not apply. She can claim a first-year allowance or AIA if the expenditure qualifies. 

Disposals

It is good practice to keep track of all items for which you have either:

• claimed plant and machinery allowances
• added the cost to a capital allowances pool without making a claim

When you dispose of an item claimed for, or added to a pool, you must account for the disposal value. This includes when you have claimed the AIA or any first-year allowance. The value you account for depends on how you disposed of the asset.

If you acquire an asset under a hire purchase or similar contract, you may cease to be entitled to the benefit of the contract without becoming the owner of the asset. In that case, special rules apply to the disposal value if you have done one of the following:

• claimed plant and machinery allowances on the cost
• added the cost to a capital allowance pool

There are also special rules when:

• disposing of items on which you have claimed the super-deduction or SR allowance
• disposing of items on which you have claimed 100% full expensing or 50% first-year allowance
• identifying the disposal value of a fixture

The fixtures section of this guidance explains the need to agree a value when there is a change of ownership in fixtures.

Read more information on disposal values

Annual investment allowance (AIA)

Annual investment allowance (AIA) is only available to one of the following: 

• an individual
• a partnership of which all members are individuals
• a company

AIA is not available to trusts or to a partnership where one or more of the members are companies.

AIA allows you to claim 100% of the cost of investing in plant or machinery in the chargeable period you incur the expenditure. The amount you can claim each year is limited. The annual limit for qualifying expenditure has been 1 million pounds since 1 January 2019.

You must adjust the amount of AIA you can claim if your chargeable period is more or less than 12 months long.

Example of adjusted AIA

For a 10-month chargeable period the maximum AIA is £833,333. You can find this figure by dividing £1,000,000 by 12 months and multiplying the result by 10 months.

Where the period in question consists of whole calendar months then it is acceptable to calculate based on days or months. In all other cases, the calculation should be done using the number of days.

There are special rules for income tax payers. These special rules apply if your period of account is longer than 18 months or you have a gap or overlap between your periods of account.

Group companies

If two or more companies are part of the same group in a financial year, then this group of companies share one AIA between them. If the AIA is £1 million then the combined claims of the group cannot exceed this amount.

Business cars

AIA cannot be claimed on business cars. There is a 100% first-year allowance that may be available if you acquire a new electric car or a new car with zero CO2 emissions. You cannot claim the super-deduction, full expensing, SR allowances, or 50% first-year allowances on business cars.

There are other restrictions on AIA that you should consider:

• general restrictions on entitlement
• restrictions on AIA applying to companies
• restrictions on AIA applying to unincorporated businesses

Detailed information about AIA.

Full expensing and 50% first-year allowance

100% full expensing for main rate expenditure and 50% first-year allowance for special rate expenditure are only available to companies within the charge to Corporation Tax.

Facts about full expensing and the 50% first-year allowance include:

• they are first-year allowances
• you can only claim for expenditure on assets that are unused and not second-hand
• you cannot claim for expenditure on cars
• you can only claim for expenditure incurred on or after 1 April 2023
• the general exclusions at s46 CAA01 apply to claims for full expensing and 50% first-year allowances, but there is an exception for background plant and machinery in a building for leasing
• extra anti-avoidance rules apply to full expensing and SR allowances

Partnerships and full expensing 

When all the members of a partnership are subject to Income Tax, the partnership cannot claim full expensing or the 50% first-year allowance. When all the members of a partnership are chargeable to Corporation Tax, the partnership may claim full expensing or the 50% first-year allowance. In this case, the partnership’s tax computation is calculated as if it were a company.

If a partnership includes some members chargeable to Income Tax and some members chargeable to Corporation Tax, then the partnership will need to create separate tax computations:

• a computation of profits for members subject to Income Tax, which cannot include any claims to full expensing or the 50% first-year allowance
• a computation of profits for members subject to Corporation Tax, which can include claims to full expensing or the 50% first-year allowance

Read more information on our approach to capital allowances claims and partnerships.

The super-deduction and SR allowance

The super-deduction and SR allowances were only available to companies within the charge to Corporation Tax. You can only claim for expenditure incurred on or after 1 April 2021 and before 1 April 2023.

Facts about the super-deduction and SR allowance include:

• they are first-year allowances
• you can only claim for expenditure on assets that are unused and not second-hand
• you cannot claim for expenditure on cars
• the expenditure cannot be the result of a contract entered into before 3 March 2021
• the general exclusions at s46 CAA01 apply to claims for the super-deduction and SR allowance, but there is an exception for background plant or machinery in a building for leasing
• extra anti-avoidance rules apply to the super-deduction and SR allowance

We published guidance to help you check if you can claim the super-deduction or SR allowance, including an interactive tool to check if your expenditure may qualify.

Partnerships and the super-deduction

When all the members of a partnership are subject to Income Tax, the partnership cannot claim the super-deduction or the 50% SR allowance. When all the members of a partnership are chargeable to Corporation Tax, then the partnership may claim the super-deduction or the 50% SR allowance, the partnership’s tax computation is calculated as if it were a company.

If a partnership includes some members chargeable to Income Tax and some members chargeable to Corporation Tax, then the partnership will need to create separate tax computations:

• a computation of profits for members subject to Income Tax, which cannot include any claims to the super-deduction or the 50% SR allowance
• a computation of profits for members subject to Corporation Tax, which can include claims to the super-deduction or the 50% SR allowance

Read more information on capital allowances claims and partnerships.

Rights under contracts and the super-deduction

Making assumptions about rights under contracts can be a cause of error. Take reasonable care to check the wording of the underlying contracts. This wording will determine when you are treated as having incurred the expenditure and when ownership of the asset is transferred to you. You cannot claim the super-deduction unless both of the following apply:

• you are claiming for the chargeable period in which you incur the expenditure
• you are treated as owning the asset at some time in that same chargeable period

Make sure you only claim for expenditure the rules treat as being incurred on or after 1 April 2021 and before 1 April 2023. The general rules on timing for hire purchase contracts, milestone contracts, and long funding leases are set out in other sections of this guidance. It is important that you check the position for multi-year projects and milestone payment contracts. It is possible they may qualify, depending on the relevant dates. Check the specific terms of the contract.

You should also make sure the expenditure is not the result of a contract entered into before 3 March 2021. Do not assume that the presence of a framework agreement or similar means the 3 March restriction does not apply. This can only be determined by a careful consideration of the terms of the contract. Expenditure resulting from contracts in place before 3 March 2021 does not qualify for the super-deduction.