Do grants reduce capital allowances

Yes. Under section 532 of the Capital Allowances Act 2001, expenditure is treated as not incurred to the extent it has been or will be met by a public body or by anyone else, so allowances are claimed only on the net cost after the grant or contribution. The main exceptions are insurance or compensation for a destroyed asset and contributions from private persons who get no tax relief themselves.

What is the general rule?

Section 532(1) of the Capital Allowances Act 2001 (CAA 2001) says a person is regarded as not having incurred expenditure to the extent that it has been, or is to be, met directly or indirectly by a public body or by any other person. A public body is the Crown or any government or public or local authority, in the UK or elsewhere (section 532(2)). The rule applies “for the purposes of this Act”, so it reaches plant and machinery allowances, the structures and buildings allowance and the other codes, with dredging the only stated carve out (section 532(3)).

HMRC’s Capital Allowances Manual at CA14100 adds detail on how widely it reads the rule. It does not matter whether the contribution:

• comes from a public body or from another business or person;
• is capital or revenue in nature; or
• is received after the spending, provided the expenditure was to be met by it.

A non returnable grant is a contribution where there is a clear connection between the grant and the capital spending. In Cyril Lord Carpets Ltd v Schofield, a grant applied for and received after the assets were bought and paid for was still deducted. HMRC also confirms that EU grants are deducted, and that a loan is not a contribution.

Which payments are not deducted?

Sections 534 to 536 set out the only exceptions, summarised at CA14200:

• Northern Ireland regional development grants. Section 534 preserved full allowances for certain grants, but CA14200 explains the Treasury order expired on 31 March 2003, so grants under agreements from 1 April 2003 are deducted in the normal way.
• Insurance and compensation. Section 535 says money paid for an asset that has been destroyed, demolished or put out of use does not reduce the cost of its replacement. HMRC’s example is a ferry operator who replaces a boat lost in a fire: the full cost of the new boat qualifies, and the insurance money is brought in as a disposal value of the old one instead.
• Private contributions with no relief. Under section 536, a contribution is ignored where the contributor is not a public body and can neither claim allowances on it nor deduct it in computing the profits of a trade or similar activity. HMRC’s example is a friend who chips in towards a shopkeeper’s computer. Section 536(6) switches this exception off for the structures and buildings allowance, so for that allowance every contribution reduces the qualifying cost.

How does a grant change the claim in practice?

The grant is taken off before any allowance is calculated, whichever allowance is used. The annual investment allowance, full expensing, the 40% first year allowance and writing down allowances all start from the net figure.

Illustration only. A bakery buys a new oven for £30,000 and receives a £12,000 local authority grant towards it.

Step	Amount
Cost of oven	£30,000
Less grant (section 532)	(£12,000)
Qualifying expenditure	£18,000
Annual investment allowance claimed	£18,000

The bakery gets relief on £18,000, not £30,000. The grant itself is normally not a trading receipt because it meets capital expenditure (BIM40451), so the business is not taxed on the £12,000 and relieved on it at the same time. Whether a particular grant is taxable as income is a separate question covered in are business grants taxable.

What if the grant arrives after the claim?

Because section 532 covers expenditure that “is to be” met by a contribution, and CA14100 says the rule applies even where the contribution is received later, a claim made on the gross cost before a grant is paid will overstate the allowances. The claim for the period of spending should be corrected once the grant is awarded. For the zero emission goods vehicle allowance, section 45DB(8) expressly withdrew the allowance where a relevant grant was paid later; see the 100% allowance for zero emission goods vehicles.

What happens if the grant has to be repaid?

Grants often carry clawback conditions, for example if the business moves or sells the asset within a set period. CA14300 explains that the legislation contains no rule giving allowances on a grant that is repaid. Extra Statutory Concession B49, which used to allow this for public grants, was withdrawn from 1 April 2013 for Corporation Tax and 6 April 2013 for Income Tax, and HMRC now refuses allowances on repaid amounts in all cases. The repayment is therefore a real cost with no capital allowance relief, which is worth factoring in before accepting a grant with onerous conditions.

How does the grant affect a later sale?

Section 62 limits any disposal value to the qualifying expenditure the person incurred on the asset. Since the grant reduced that qualifying expenditure, the cap is the net cost. Continuing the illustration, if the bakery sells the oven three years later for £20,000, the disposal value brought into the main pool is limited to £18,000. The general mechanics are in balancing charges and allowances.

Can the person who pays the contribution claim allowances?

Sometimes. Section 537 lets a contributor claim a contribution allowance where it contributes a capital sum towards someone else’s expenditure on an asset, the recipient would otherwise have been entitled to allowances (or is a public body), and the two are not connected. Section 538 then treats the contribution as the contributor’s own expenditure on plant or machinery, provided it was made for the purposes of the contributor’s trade or other relevant activity, and requires it to go into a single asset pool.

HMRC’s example at CA14400 is a restaurant owner contributing to a market gardener’s new equipment: the contribution is deducted from the gardener’s cost and the restaurant claims allowances on it. If the two are married they are connected, so the restaurant gets nothing, but the gardener keeps allowances on the full cost because the contribution then falls within the section 536 exception.

What mistakes come up most often?

• Claiming allowances on the gross invoice when a grant has been or will be received.
• Assuming a grant received in a later year can be ignored.
• Treating a loan or repayable finance as a grant; HMRC does not treat a loan as a contribution.
• Deducting insurance money from the cost of a replacement asset. It belongs in the disposal value of the old asset.
• Following the accounts. In the financial statements a capital grant is often released to profit over the asset’s life (see accounting for government grants), but the tax computation deducts the whole grant from the cost upfront.
• Expecting relief on a grant that is later clawed back.

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Related Accountapedia entries

• Capital allowances for landlords
• How company benefits reduce your tax code
• Are business grants taxable
• Can my company’s losses reduce my personal tax
• Capital allowances in a partnership

Sources

• legislation.gov.uk: Act 2001 c. 2, section 532
• GOV.UK: Manual page CA14100
• legislation.gov.uk: Act 2001 c. 2, section 534
• GOV.UK: Manual page CA14200
• legislation.gov.uk: Act 2001 c. 2, section 535
• legislation.gov.uk: Act 2001 c. 2, section 536
• GOV.UK: Manual page BIM40451
• legislation.gov.uk: Act 2001 c. 2, section 45DB
• GOV.UK: Manual page CA14300
• legislation.gov.uk: Act 2001 c. 2, section 62

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.