You spent £47,000 fitting out your new agency office in Manchester’s Northern Quarter. New desks, lighting, a breakout area, kitchenette, and that exposed brick wall you insisted on. It looks great. Clients love it. Your team actually wants to be in the office.
But here’s the question nobody asked you: how much of that £47,000 can you claim back against corporation tax?
If your accountant hasn’t mentioned capital allowances on office fit-out costs for your agency, you’re probably leaving money on the table. I see it all the time. Agencies spend serious money on their workspace, then treat the whole lot as a fixed asset depreciating at 10% a year. That’s the slow route. The tax-efficient route is claiming capital allowances on everything that qualifies as plant and machinery.
This article explains exactly what qualifies, what doesn’t, and how to structure your claim so HMRC doesn’t push back.
What Are Capital Allowances, Actually?
Capital allowances let you deduct the cost of certain assets from your taxable profits. Instead of spreading the cost over the asset’s useful life through depreciation (which isn’t tax deductible anyway), you write off the cost against your corporation tax bill.
For a limited company paying 19% or 25% corporation tax, every £10,000 of qualifying expenditure saves you £1,900 to £2,500 in tax. That’s real money.
The main reliefs you’ll use for an office fit-out are:
- Annual Investment Allowance (AIA): 100% relief on the first £1 million of qualifying plant and machinery expenditure per year. You deduct the full cost in the year you spend it.
- Writing Down Allowances (WDA): For assets that don’t qualify for AIA, or if you’ve used your AIA cap elsewhere. Typically 18% or 6% per year on a reducing balance basis.
- Structures and Buildings Allowance (SBA): 3% straight-line relief per year on the cost of the physical building structure itself. This applies to new builds or major renovations, not standard fit-outs.
Most agency fit-outs fall under AIA. The question is which bits of your fit-out count as plant and machinery, and which bits don’t.
What Qualifies as Plant and Machinery in an Office Fit-Out
HMRC defines plant and machinery broadly as equipment you use to carry on your trade. For an agency, that includes most of the things that make your office functional rather than just a shell.
Fixtures That Qualify
These items almost always qualify for capital allowances:
- Electrical systems: Power sockets, data cabling, lighting fixtures (but not the building’s main electrical supply)
- Heating and air conditioning: Boilers, radiators, air conditioning units, ventilation systems
- Sanitary ware and plumbing: Sinks, toilets, showers, kitchenette fittings
- Fire alarm and security systems: Detection, alarm panels, CCTV, access control
- Built-in furniture: Fitted desks, shelving, reception desks, kitchen units that are fixed to the building
- Floor coverings: Carpet, vinyl, laminate (but not the screed or subfloor)
- Blinds and curtains: Window coverings that are fixed in place
- Partition walls: Demountable or stud partition walls (but not load-bearing structural walls)
- Signage: Internal and external signage, including illuminated signs
- Telephone and IT infrastructure: Phone systems, server racks, structured cabling
For a typical agency fit-out, 60-80% of the total cost often qualifies as plant and machinery. That’s a significant chunk.
What Does NOT Qualify
Some costs are excluded from capital allowances. These are treated as part of the building itself:
- Structural walls and floors: Load-bearing walls, concrete floors, roof structure
- Main building shell: The basic fabric of the building, brickwork, windows, doors (unless they’re specialist)
- External works: Landscaping, car parks, paths (unless directly used in the trade)
- Decorative items: Free-standing artwork, plants, ornaments (but integrated lighting for display purposes may qualify)
- General repairs and decoration: Painting, plastering, re-carpeting like-for-like (these are revenue expenses, not capital)
Here’s where it gets tricky. If you replace an old carpet with a new one of similar quality, that’s likely a repair, deductible as a revenue expense in full. If you upgrade the carpet as part of a full fit-out, it’s capital. The distinction matters.
A Real Example: 12-Person Digital Agency Fit-Out
Let’s make this concrete. A Bristol-based digital agency spent £63,400 on their office fit-out. Here’s how the costs broke down and what qualified:
| Item | Cost | Qualifies? |
|---|---|---|
| Partition walls and glazing | £12,800 | Yes |
| Electrical and data cabling | £8,200 | Yes |
| LED lighting throughout | £4,600 | Yes |
| Air conditioning installation | £6,900 | Yes |
| Fitted desks and reception desk | £9,300 | Yes |
| Kitchenette with units and appliances | £5,100 | Yes |
| Carpet and vinyl flooring | £3,800 | Yes |
| Blinds and curtains | £1,200 | Yes |
| Painting and decoration | £3,500 | No, revenue expense |
| Free-standing sofas and coffee tables | £4,000 | Yes, separate plant items |
| Structural alterations to wall | £2,000 | No, building fabric |
| External signage | £2,000 | Yes |
| Total | £63,400 |
Total qualifying expenditure: approximately £57,900. Non-qualifying: £5,500.
Using AIA, the agency claimed 100% relief on the £57,900 in the year of expenditure. At 19% corporation tax, that saved them £11,001 in tax. At 25%, it would save £14,475.
The £5,500 on decoration and structural work was treated as a revenue expense anyway, so it was fully deductible against profits. The free-standing sofas and coffee tables? Those qualify as separate plant items, so they go through the capital allowances claim too.
How to Structure Your Claim
You can’t just hand your accountant a total fit-out cost and expect them to sort it out. HMRC expects a detailed breakdown. Here’s the process:
Step 1: Get an Itemised Invoice From Your Contractor
Before you pay the final bill, ask your fit-out contractor for a fully itemised breakdown. Not just “office fit-out, £48,000”. You need line items showing the cost of each element: partitions, electrics, lighting, flooring, joinery, decoration.
If the contractor can’t or won’t provide this, you’ll need a quantity surveyor or a capital allowances specialist to apportion the costs. That costs money, but it’s often worth it on fit-outs over £50,000.
Step 2: Separate Capital from Revenue
Go through the itemised list and split costs into three buckets:
- Capital, plant and machinery: Claim via AIA in the year
- Capital, building fabric: Claim via SBA at 3% per year (if you own the building)
- Revenue: Deduct in full as a trading expense (decoration, repairs, consumables)
Your accountant should do this with you. If they’re not comfortable with capital allowances, ask them to bring in a specialist. Many ICAEW firms have capital allowances partners they work with.
Step 3: Claim on Your Corporation Tax Return
The claim goes on the capital allowances section of your CT600 corporation tax return. You’ll need to complete the relevant computations showing the qualifying expenditure, the AIA claimed, and any residual pool for writing down allowances.
If you’re using accounting software like Xero or QuickBooks, make sure your fixed asset register categorises each item correctly. Don’t lump everything into one “office fit-out” asset. Split it into the qualifying pools.
What If You’re in a Leased Office?
Most agencies lease their office space. Does that affect capital allowances? Yes and no.
If you’re a tenant and you pay for the fit-out yourself, you can claim capital allowances on the plant and machinery you install. The fact that you don’t own the building doesn’t matter. HMRC treats tenant improvements as qualifying expenditure.
If your landlord paid for the fit-out and you pay a higher rent to cover it, you generally can’t claim capital allowances. The landlord can, because they own the asset. But in practice, most landlords don’t bother, and the allowances are lost.
If you’re negotiating a new lease, consider asking the landlord to contribute to the fit-out cost in exchange for you retaining the capital allowances. This is a common negotiation point in commercial leases. A good commercial property solicitor can help structure it.
Capital Allowances on Second-Hand Fit-Outs
Maybe you took over an existing office with a fit-out already in place. Can you claim capital allowances on what the previous tenant left behind?
Yes, but only if you bought the fixtures as part of the lease assignment or property purchase. You need to agree a value for the fixtures with the seller, and both parties must submit a joint election to HMRC (form CAA2001) within two years of the transaction. Without that election, the seller retains the capital allowances and you get nothing.
If you’re buying a leasehold office from another agency, ask your solicitor about this before exchange. It’s a common oversight.
Common Mistakes Agencies Make
I’ve seen the same errors repeatedly. Avoid these:
- Claiming everything as a repair: If you’re doing a full fit-out, it’s capital, not a repair. Claiming it as a revenue expense works in the year, but you lose the ability to claim on specific assets if HMRC challenges it.
- Not separating decoration from fixtures: Painting and plastering are revenue. Everything else is capital. Mixing them up invites HMRC questions.
- Forgetting the small stuff: Blinds, signage, kitchen appliances, fire extinguishers, they all qualify. Don’t leave them off your list.
- Assuming your contractor’s invoice is HMRC-ready: Most builders invoice in lump sums. You need to do the breakdown yourself or pay someone to do it.
- Missing the deadline: AIA must be claimed in the year of expenditure. You can amend a return within 12 months of the filing date, but after that, the window closes.
When to Bring in a Specialist
For fit-outs under £30,000, your regular accountant can probably handle the claim. The breakdown is straightforward, and the tax saving is modest enough that a specialist’s fee would eat into it.
For fit-outs between £30,000 and £100,000, it’s worth asking your accountant to review the breakdown carefully. If they’re not confident, get a second opinion from a capital allowances specialist. Many will review your contractor’s invoice for a fixed fee of £500-£1,000 and produce the computation.
For fit-outs over £100,000, bring in a specialist from day one. They’ll work with your contractor during the design phase to maximise qualifying expenditure. The tax saving on a £200,000 fit-out could be £38,000-£50,000. A specialist fee of £3,000-£5,000 pays for itself many times over.
What About Free-Standing Furniture and Equipment?
Free-standing furniture, desks that aren’t fixed, chairs, filing cabinets, sofas, coffee tables, these are all plant and machinery. They qualify for AIA in full.
But there’s a trap. If you buy these items separately from the fit-out, they’re straightforward. If you buy them as part of a single fit-out contract, they need to be itemised on the invoice. Otherwise, they get lumped in with the building works and you lose the ability to claim separately.
Computers, monitors, servers, and other IT equipment are also plant and machinery. They qualify for AIA too. Don’t forget to include them in your overall capital allowances review.
Structures and Buildings Allowance: When It Applies
If you own your office building outright and you’ve done a major renovation or extension, you may qualify for the Structures and Buildings Allowance (SBA). This gives 3% straight-line relief per year on the cost of the physical building structure.
For a £500,000 office renovation, that’s £15,000 per year in tax deductions for 33 years. It’s not as generous as AIA, but it’s better than nothing.
SBA applies to new builds and major structural works completed after 29 October 2018. It doesn’t apply to standard fit-outs in leased offices. Your accountant can advise if this applies to your situation.
Final Practical Steps
If you’ve recently completed an office fit-out or are planning one, here’s what to do:
- Get an itemised invoice from your contractor before you pay the final bill.
- Review the breakdown with your accountant to identify qualifying plant and machinery.
- Claim AIA on all qualifying items in the year of expenditure.
- Keep detailed records of costs and the basis of your claim.
- If the fit-out cost more than £50,000, consider a capital allowances specialist review.
If your contractor has already invoiced you as a lump sum, don’t panic. You can still apportion the costs retrospectively. Your accountant can work with a quantity surveyor to produce a reasonable breakdown. HMRC accepts estimates based on industry benchmarks, as long as they’re reasonable and supported by evidence.
The key is to act before your corporation tax return deadline. Once you file and the window for amendment closes, you lose the ability to claim. That’s tax relief you’ll never get back.
If you’re an agency founder reading this and thinking “I definitely missed something on my last fit-out”, ask your accountant to review your fixed asset register. You may be able to amend a recent return. If not, at least you’ll know for next time.
And if your current accountant isn’t comfortable with capital allowances, speak to us. As ICAEW qualified accountants working exclusively with agency founders, we deal with these claims regularly. We know what qualifies and what doesn’t, and we won’t let HMRC push back on a valid claim.