Capital allowances

Tax relief in the form of capital allowances can be claimed on the cost of certain capital expenditure and set against the taxable profits of a trade or business activity. The most common forms of allowances are those given on items of plant and machinery, including motor vehicles.

For charities incurring capital expenditure on buildings they occupy and plant and equipment for their own use, or for charities that engage only in primary-purpose trading activities or property investment businesses, there is no need to consider the capital allowances regime because their income, including the profits from such trading activities, are exempt from tax.

However, if capital expenditure is incurred by a trading subsidiary, the capital allowances regime can be relevant because the accounting profits of the company will contain a charge for depreciation, which is not deductible for taxation purposes and must instead be replaced with a claim for capital allowances. This will therefore need to be dealt with before the charity calculates the profits for the purposes of the Gift Aid transfer to the parent charity.

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