Enhanced capital allowance in Freeport tax sites

What the enhanced capital allowance is

The enhanced capital allowance is a relief for plant or machinery bought for use in a special tax site, an area of land in a Freeport or Investment Zone where businesses can claim certain tax reliefs. ^[1] Where its conditions are met, 100% of the qualifying expenditure can be set against the profits of the qualifying activity for the accounting period in which it takes place.

Whether new equipment or a fit-out may support claiming capital allowances depends on what was bought, where it is used and who bought it.

The relief can be claimed for expenditure incurred from the date a special tax site is designated until 30 September 2031 for English Freeport sites and 30 September 2034 for Scottish Green Freeport, Welsh Freeport and Investment Zone sites. No claim can be made until the relevant site has been designated. A Freeport tax site is separately authorised from a Freeport customs site, although the two can cover the same land.

Conditions the plant or machinery has to meet

The plant or machinery must be for use primarily in a designated special tax site at the time the expenditure is incurred. It must be unused and not second-hand. It must be for use as part of the trade, or an activity arising from land where the profits or losses are treated for tax purposes as arising from a trading activity. The business must also be registered for Corporation Tax.

Equipment used both inside and outside a site needs care. Where plant or machinery is also for use outside a special tax site and the main purpose of the expenditure is to get the enhanced capital allowance for the part used outside, only the expenditure attributable to the part for use in the site can be claimed at 100%. In the GOV.UK forklift truck example, the cost is apportioned on a just and reasonable basis, and relief for the part that does not qualify is available through other capital allowances.

The relief is claimed on the tax return. It sits apart from the AIA, and the guide to the Annual Investment Allowance covers that allowance.

Keeping equipment in the site after purchase

The relief does not end with the purchase. The primary use of the plant or machinery must continue to be for a special tax site for 5 years from when it is first used in a special tax site, or first kept for use there, as part of the trading activity or an activity arising from land where the profits or losses are treated for tax purposes as arising from a trading activity.

The relief claimed should be withdrawn if the plant or machinery ceases to be for primary use in a special tax site during the 5 year period. HMRC must be notified within 3 months of the plant or machinery ceasing to be for primary use in a special tax site.

Cars and the other first-year allowances

Where expenditure qualifies for more than one plant and machinery allowance, the business can choose which one to claim, but it cannot claim more than one against the same amount of expenditure. ^[2] Companies investing in plant or machinery for use in a special tax site may be able to claim full expensing or the 50% first-year allowance as well, but not more than one allowance against the same expenditure. ^[3]

Full expensing and the 50% first-year allowance may be available to a company subject to Corporation Tax for expenditure incurred on or after 1 April 2023. ^[4] The 40% first-year allowance covers plant or machinery bought on or after 1 January 2026 that qualifies for the main rate of writing down allowance, and it is only available for items bought new and unused.

Cars do not qualify for full expensing, the 50% first-year allowance or the 40% first-year allowance. The guide to capital allowances on cars covers emission bands, pools and electric cars.

Claiming allowances on improvements to leased premises

Improvements to leased premises may qualify where the work is plant or machinery: alterations to a building to install plant or machinery count as plant and machinery, but repairs do not.

A landlord that leases out commercial property may be able to claim for background plant or machinery in the leased buildings, such as lighting, wiring and central heating. In the GOV.UK example, new plant and machinery costing £300,000, installed as integral features in a new warehouse in a special tax site, qualifies for the enhanced capital allowance on the entire cost.

Are carpets plant or machinery?

There is no specific carpets rule in the guidance on these allowances, so the question comes back to the general test. Capital allowances can be claimed on items that are kept to use in the business, which are known as plant and machinery. What counts as plant and machinery will depend on the nature of the business. ^[4]

Whether carpets may qualify could therefore depend on how they are used in the particular business, and the facts of each fit-out would need to be looked at.

Carpets are not named in the guidance, so whether capital allowances can be claimed on them depends on whether they count as plant and machinery in the particular business.

Is the capital gains allowance linked to capital allowances?

Capital allowances are a type of tax relief for businesses that let them deduct some or all of the value of an item from their profits before they pay tax.

The tax-free amount for a particular tax year is not covered by the guidance this article draws on, so it is not stated here.