Capital Allowances, Fit-Out, and the Budget: What SMEs Should Know Before Investing in Premises

If you are taking on a new lease, fitting out a space, or investing in improvements to your current premises, the tax treatment of that expenditure matters significantly. Capital allowances determine how much you can deduct from your taxable profits — and the Autumn Budget could change the rules.

What capital allowances are

When your business spends money on assets — equipment, furniture, machinery, certain fixtures — you cannot deduct the full cost in the year of purchase for tax purposes in the way you can with most day-to-day expenses. Instead, you claim capital allowances: a tax deduction spread over time, or in some cases, taken in full in the year of purchase.

For premises-related expenditure, the most relevant allowances are:

Annual Investment Allowance (AIA). Allows businesses to deduct 100% of qualifying plant and machinery expenditure up to £1 million in the year of purchase. For most SMEs fitting out commercial space, the AIA covers their entire qualifying expenditure.

Full Expensing. Introduced in 2023 and made permanent in 2024, Full Expensing allows companies (not sole traders or partnerships) to deduct 100% of qualifying new plant and machinery costs immediately, with no upper limit. This is particularly valuable for larger fit-out projects.

Structures and Buildings Allowance (SBA). Covers new construction or renovation of commercial buildings at 3% per year straight-line. This is slower than other allowances and less immediately impactful, but it does allow deduction of expenditure on the fabric of a building that does not qualify as plant and machinery.

What may change in the Budget

The Budget could adjust the scope, rate, or availability of any of these allowances. The most likely changes are:

• Reduction in the AIA threshold (reducing it from £1 million to a lower figure)
• Changes to the Full Expensing regime — either restricting qualifying categories or introducing conditions
• Extension of SBA to cover more types of expenditure (which would be a positive change for occupiers investing in buildings)

What to do if you are planning premises investment

If you are planning significant fit-out expenditure, the timing of that decision relative to the Budget could affect the tax relief you receive. Specifically:

• Expenditure incurred before a Budget date is treated under the rules in force at that time
• If the Budget reduces AIA or changes Full Expensing, completing your expenditure beforehand may lock in more favourable treatment
• Consult your accountant before committing to timing based on Budget speculation — actual announcements may differ from pre-Budget expectation

The other key point is that capital allowances are only available to the party that incurs the expenditure. If your landlord fits out the space and gives you a rent-free period as an incentive instead, the landlord claims the allowances — not you. If you negotiate a capital contribution (cash from the landlord to fund your own fit-out), you claim the allowances on that expenditure. Understanding which structure applies to your lease negotiation has a direct effect on your tax position.

RE:match connects businesses with landlords who are open to negotiating terms — including fit-out contributions and incentives. Post your requirement at rematch.co.uk.