Contrary to common misconceptions, claiming capital allowances is not a straightforward process. Entitlement must be established and qualifying expenditure must be properly identified. The following are some of the most common errors and issues taxpayers should be aware of.

The entitlement to claim has not been established properly.

This is a significant risk issue as it could reduce the quantum of the claim or negate it entirely. For example, taxpayers must be satisfied that they have the burden of wear and tear. Taxpayers should also pay particular attention to assets included as part of third-party agreements or finance lease agreements, as these will impact entitlement.

There is insufficient supporting documentation available to support the claim. 

In the event of an audit, Revenue is likely to focus on documentation from the outset. For example, where a claim is being made on a refurbishment project, tender documents and Main Contractor Reports are typically required; invoices tend to offer insufficient evidence as they do not typically provide any description of the work undertaken.

The taxpayer has over-claimed, resulting from incorrect inclusion and/or treatment of certain types of expenditure.

Not all capital expenditure qualifies for capital allowances. For example, taxpayers should not include 100% of expenditure categorised as “Leasehold Improvements” in trial balances or financial statements as qualifying. There is no direct correlation between accounting classification of assets and their treatment for capital allowances purposes.

The taxpayer has under-claimed, resulting from the exclusion of qualifying expenditure.

The taxpayer has under-claimed, resulting from the exclusion of qualifying expenditure.

Incorrect identification of the chargeable period in which the qualifying asset has been brought into use.

Issues often arise when there is a period of testing and commissioning being carried out or where a property has only been partly brought into use.

Related issues

• Contrary to common misconceptions, there is no approved list of assets that qualify for capital allowances. There is no legislative definition of the term “plant and machinery” or “factory”, so the identification of qualifying items is not straightforward. The meaning of P&M for tax purposes is very broad and in practice covers a vast range of items extending far beyond moveable items and fixtures and fittings. For example, “plant” often exists in the fabric of a building. Whether something is considered P&M and thereby qualifies is determined by reference to principles established in case law and Revenue practice. 
• Capital allowances cannot be claimed in respect of grants or contributions. These need to be properly identified and treated appropriately. 
• The amount identified as qualifying expenditure must be “incurred” and that expenditure should be identifiable in the financial statements in the relevant chargeable period. In building, refurbishment and fit-out projects that span over a number of years issues can arise where there are retention payments held.