What are capital allowances?
In computing tax due on your business profits as a trader or professional person, you do not get any allowance for depreciation of business assets. Instead, you are given a capital allowance over several chargeable periods until the cost of the asset has been fully allowed. The capital allowance is given on the cost of the asset exclusive of grants and VAT (where the acquirer is VAT-registered). You may be due an allowance for:
(a) Machinery or plant used in the business. You get an annual wear and tear allowance of 12.5% of the cost of the asset on a straight line basis over eight years. You get a similar allowance for expenditure on software. You may be due a balancing allowance (or you may own a balancing charge) if you dispose of an item of machinery or plant on which you claimed capital allowances and you have underclaimed (or overclaimed) such allowances.
If you carry on a trade of leasing machinery or plant, you may only set off the related capital allowances against income from that trade. This is relaxed if not less than 90% of your activity consists of leasing. Capital allowances on assets let under a balloon lease (involving a large “balloon” payment towards the end of the lease period) may only be set against income from that lease. This is relaxed for certain foreign currency leases and long-term leases.
(b) Cars used in the business. If you buy a car, you get a straight-line capital allowance of 12.5% of all or part of €24,000 (the specified amount), depending on the car’s CO2 emission levels:
Category A: 0g/km up to and including 120g/km,
Category B: More than 120g/km up to and including 140g/km,
Category C: More than 140g/km up to and including 155g/km,
Category D: More than 155g/km up to and including 170g/km,
Category E: More than 170g/km up to and including 190g/km,
Category F: More than 190g/km up to and including 225g/km,
Category G: More than 225g/km.
For vehicles in categories A, B and C, the capital allowance is given by reference to the full specified amount, i.e., €24,000.
For vehicles in categories D or E, if the retail price was less than or equal to €24,000, the capital allowance is €12,000. If the retail price is greater than €24,000, the capital allowance is 50% of that price.
For vehicles in categories F or G, the capital allowance is nil.
If you buy a taxi or short-term hire car for use in these businesses, you get an unrestricted write off of the purchase price at 40% per annum on a reducing balance basis.
(c) Industrial buildings used in the business. This is not confined to factory-type buildings. There are three types of allowance:
(i) an industrial building annual allowance (also known as writing down allowance),
(ii) an industrial building accelerated writing down allowance (also known as “free depreciation”), and
(iii) an industrial building initial allowance.
These latter two allowances are now generally restricted to qualifying premises located in renewal incentive areas.
You are entitled to the industrial building allowance if you held the legal interest (known as the relevant interest) in the property at the time the expenditure was incurred. It may be a freehold interest or a leasehold interest, but you can only claim the industrial building annual allowance if you are the person who incurred the expenditure (i.e., the person who holds the relevant interest), or the successor in title to that person.
It is not essential that you directly use the property as an industrial building in your own trade. If you are a landlord, you may be entitled to an allowance in respect of a building which is used for industrial purposes by your tenant. In such a case, you cannot claim “free depreciation”. This is an accelerated writing down allowance given in respect of premises in renewal area.
Industrial buildings annual allowance may be claimed at the following rates:
(a) 15%, in respect of expenditure on:
(i) palliative care units (hospices),
(ii) private convalescent facilities,
(iii) private hospitals,
(iv) registered nursing homes,
(v) sports injury clinics.
(b) 10%, in respect of expenditure on:
(ii) buildings for intensive livestock production,
(i) market gardening structures.
(c) 4%, in respect of expenditure on:
(iii) airport buildings, structures, runways, aprons,
(iv) camp/caravan site buildings and structures,
(i) factories, mills, dock undertakings,
(ii) mineral analysis laboratories,
(vi) hotels.
(d) Farm buildings. If you are a farmer, your expenditure on farm buildings may qualify for a farm building allowance of 15% in each of the first six years and 10% in the seventh year.
(e) Milk quota. You may write off expenditure on the purchase over a seven year period.
(f) Mining and exploration activities. You may be entitled to a special allowance for expenditure incurred in exploring for minerals and petroleum resources, and mine development expenditure.
(g) Intellectual property. You may be entitled to an annual allowance of 10% of the capital expenditure on patents acquired.
(h) Transmission capacity rights. You may write off the cost of acquiring such rights over seven years (15% x 6 plus 10%).