In recent months HMRC has clarified a number of points in its capital allowances guidance following consultations with professional bodies. These changes are designed to reduce uncertainty and make claims easier to apply in practice. Some ambiguity remains because the underlying legislation is still principle-based, but the updates represent useful progress for businesses.

For companies in South Wales investing in new machinery, property improvements or technology, understanding these developments is important to ensure claims are both accurate and tax efficient.

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What Are Capital Allowances and Why They Matter

Capital allowances allow businesses to deduct the cost of qualifying assets from their taxable profits. Assets may include machinery, equipment, fixtures, vehicles and certain software.

Since April 2023 the UK has introduced full expensing, which allows companies to deduct 100% of the cost of qualifying new and unused plant and machinery in the year of purchase. The 50% first year allowance is available for special rate expenditure. Both reliefs apply only to companies.

For other businesses, such as sole traders and partnerships, the Annual Investment Allowance remains a valuable option, offering 100% relief on qualifying plant and machinery expenditure up to £1 million.

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Key Updates from HMRC

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Clarification on “Unused and Not Second-Hand”

HMRC’s guidance at CA23174AB now provides more detail on how the rule applies in practice.

• If new parts are added to an existing second-hand asset, only the cost of the new parts qualifies for full expensing.
• If a second-hand asset is dismantled and its parts are reused to create a new item, the resulting asset may be regarded as new and unused.
• Expenditure on new software and on improvements to existing software may also qualify.

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Fixtures and Chattels

The distinction between fixtures and chattels is often a point of confusion, particularly in property transactions. HMRC’s updated guidance includes clearer examples. A radiator, for example, is a chattel until it is installed, at which point it becomes a fixture.

The guidance also includes more detail on the requirements for a valid section 198 election, which is used to allocate plant and machinery values between buyers and sellers in property transactions.

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Technical Adjustments

Other updates include:

• Expanded guidance on long-life assets at CA23700
• Clarification of the eligibility of Real Estate Investment Trusts to claim first year allowances
• Removal of outdated references to older technologies
• Refreshed case law examples, including SSE Generation at CA22005
• Improved explanation of how different plant and machinery allowances interact

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Areas Still Under Review

HMRC has confirmed that further work is underway in several areas that continue to cause difficulty. These include:

• The treatment of leasing arrangements
• The entitlement of employees and office holders to claim allowances
• The definition of plant in the legislation
• How contributions to expenditure should be treated

Businesses should expect more updates to follow in these areas.

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Implications for Businesses

These changes are relevant for any company planning capital investment in equipment, property fit-outs or IT infrastructure. Businesses should review whether their planned expenditure is genuinely new and unused, consider how fixtures and chattels are classified, and ensure elections and documentation are completed correctly.

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How We Can Help

At Mitchell Associates Chartered Accountants, our South Wales-based team works with businesses across a range of sectors to ensure they maximise available reliefs. We can review your investment plans, check past claims against the updated HMRC guidance, and ensure your claims are compliant and tax efficient.

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If your business is planning significant capital expenditure, now is the right time to seek advice. Speak to our team today and make sure you are getting the full benefit of the reliefs available.