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In the broadest sense, capital allowances are a form of tax-approved depreciation. Depreciation, as calculated under GAAP, is not an allowable deduction in computing the profits of a trade chargeable to income tax or corporation tax because it is an item of a capital nature. See the Capital vs revenue expenditure guidance note.

Instead, relief is given by treating the capital allowances as an expense to be deducted when arriving at the taxable trading profits. Likewise, any charges are treated as taxable receipts.

The relevant legislation is set out in the Capital Allowances Act 2001.