Depreciation charged in the accounts is not generally an allowable deduction for tax purposes. Instead, tax depreciation is given through a system known as capital allowances.
Most businesses are eligible for an Annual Investment Allowance (AIA), of £200,000 with effect from 1 January 2016. Expenditure on plant and machinery up to the amount of the AIA qualifies for a 100% tax write-off.
Expenditure on plant and machinery not covered by the AIA and on certain other types of capital assets may qualify for an annual writing down allowance of between 8% and 18%, the rate of which varies according to the type of asset. For most plant and machinery not covered by the AIA, the annual rate for writing down allowance is currently 18% (calculated on a reducing balance basis).
It is not mandatory for a business to claim capital allowances.
A special form of tax amortisation may be available to companies in respect of expenditure incurred on certain intangible assets (including goodwill). However, the rules are complex in relation to this area and have undergone recent change. Broadly, amortisation of intangible assets acquired before 1 April 2002 or after 8 July 2015 will not be deductible for tax purposes.