Your Pathway to Tax Relief
This comprehensive article will guide you about Capital allowance: What are they and they can be claimed to reduce your tax liability.
When it comes to tax relief, business outlays are deemed either as revenue expenditure or capital expenditure. This distinction is the first step, and it necessitates asking whether the expenditure will provide enduring benefit to the company (capital), if it should be seen as a repair (revenue) or enhancement (capital), and if only a fraction of the asset is being substituted (likely to be income) or all of it (capital).
With regard to revenue expenditure, it can be subtracted from income in the year it was acquired, which hastens tax relief, but capital expenditure depends on different guidelines. Capital allowances then offer a way to secure tax relief for the purchase of capital goods. Such allowances are taken into consideration when figuring out taxable profits.
Depending on what you are buying, the timing of the purchase, and sometimes the form of financing, the regulations can vary. Certain criteria must be met in order for the expenditure to be classified as capital expenditure and be eligible for capital allowances, and the amount of relief can change based on the category. For instance, Structures and Buildings Allowance (SBA) provides 3% relief, whereas the new super-deduction offers 130%.
It can be a difficult decision to determine which allowances will be most beneficial to your business. Normally, this involves analyzing the replacement cycle alongside all the possible allowances, and then claiming the ones that are eligible for maximum tax relief as soon as possible. Even before the recent changes in the Budget, the regime was complicated, but now it is even more so.
Types of expenses for obtaining tax relief on capital investments
- plant and machinery
- structures and buildings
Additionally, there are concessions available for tasks that involve:
- research and development
- dredging
- extracting minerals
- patents and know-how (For unincorporated businesses.
Companies are provided for under different rules) - freeports and, for expenditure to 31 March 2021,
enterprise zones.
Contemplating about equipment and machines
Businesses, individuals, and partnerships may be able to take advantage of Plant and Machinery Allowances (PMAs). In order to be eligible,
- they need to be involved in a trade, property business, or any other approved activities.
- Likewise, the expenditure must be capital expenditure for plant or machinery, either partly or wholly, to be used for the designated activity.
- As a result, the business must own the equipment due to the expense.
Which assets are eligible for capital allowances?
Possessions of significant value required for conducting business can be purchased using a PMA. This could be furniture, machines, computers, and other relevant tools. Features that are integral to the business are also eligible, along with certain fixtures like fitted kitchens or bathrooms. Modifications to the building to install machinery or plant can be taken into consideration, excluding repairs. Cars are also part of the plant and machinery category, but they have their own regulations. In light of the rising awareness of carbon emissions, the government offers tax deductions for zero and ultra low emission vehicles (refer to page 6 for more information).
What doesn’t qualify for capital allowances?
Possessions of significant value required for conducting business can be purchased using a PMA. This could be furniture, machines, computers, and other relevant tools. Features that are integral to the business are also eligible, along with certain fixtures like fitted kitchens or bathrooms. Modifications to the building to install machinery or plant can be taken into consideration, excluding repairs. Cars are also part of the plant and machinery category, but they have their own regulations. In light of the rising awareness of carbon emissions, the government offers tax deductions for zero and ultra low emission vehicles (refer to page 6 for more information).
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The Annual Investment Allowance
The Annual Investment Allowance (AIA) is the most efficient way of getting tax relief for assets that are qualified for PMAs. This allowance will give a 100% deduction for the cost of most plant and machinery items, apart from cars. There is a yearly limit of a million pounds for many businesses. Moreover, there are 100% first-year allowances that are not available for every type of asset. These are mainly for low emission vehicles. When the AIA/first-year allowances are not available or have been used, the qualifying expenditure can be pooled and Writing Down Allowances (WDAs) can be applied. These give a relief of 18% every year or 6%, depending on the kind of asset.
Recent developments
Business vehicles: new tax year, new rules
The 100% first-year allowance (capital allowance) for new cars that have a low amount of carbon dioxide emissions has been extended up until March 31, 2025. The emission limit decreases from 50g/km to 0g/km for purchases made on or after April 1, 2021. There is also an extension for zero emission goods vehicles that ends in 2025. If you are looking to apply for Income Tax, the expenditure must take place on or before April 5, 2025. For Corporation Tax, the deadline is March 31, 2025. If you would like to know more about the tax benefits this provides, please reach out to us.
AIA: plan now for lower limit
As of now, the Annual Investment Allowance (AIA) stands at its peak amount of £200,000. However, this amount shall reduce to £200,000 from 1 January 2022, with transitional rules to be followed for accounting periods falling between this date. For this reason, it is vital to consider when the expenditure is made, as the rules may restrict the amount of the AIA that can be claimed. Therefore, if you have any plans, it is best to consult with us prior, in order to make the most out of the tax relief.
Structures and Buildings Allowance (SBA)
An Structures and Buildings Allowance is an annual 3% writing down allowance on a straight-line basis. It can be used to cover the cost of demolishing a building or structure, or the value of its land, but neither land nor dwellings are eligible. It was introduced in 2018 for expenditure on business-related buildings and structures. It now provides an annual 3% writing down allowance on a straight-line basis. It usually runs for 33 and 1/3 years from the building’s first use. A freeport is available. The SBA is designed to promote investment in the construction of new structures and buildings for commercial use, the necessary works to bring them into existence, and the improvement of existing structures and buildings. It includes the cost of converting existing premises for use in a qualifying activity but neither land or dwellings are eligible.
Budget measures
The Budget introduced the super-deduction and the first-year special rate allowance (SRA). Both are time limited.
The super-deduction:
- This scheme is only applicable to companies and not to unincorporated businesses.
- It grants relief from expenses incurred on qualifying plant and machinery from April 1st 2021 to March 31st 2023.
- It provides 130% relief for most new plant and machinery that would have been eligible for 18% main rate writing down allowance.
- It cannot be used for second-hand assets or assets excluded by capital allowance rules, such as expenditure on most leased plant and machinery.
It is essential to keep in mind the following points:
- Agreements made prior to March 3, 2021 are not allowed, even if the costs are incurred after April 1, 2021.
- Extra stipulations are applicable to hire purchase and comparable contracts.
- Specific regulations are in place for disposing assets.
- Apportionment will be complex for accounting periods beginning before and after April 1, 2023.
The SRA:
- Companies must adhere to the same conditions as those outlined in the super-deduction framework,
- they will be eligible to receive 50% relief of the total cost in the first year for any expenditures that qualify for 6% special rate WDAs.
- This applies to integral features in the property, such as electrical systems, lifts, and space or water heating systems, as well as long-life assets.
The advantanges and disadvantages
When setting up a business with a high capital expenditure, there may be considerable advantage to using the super-deduction. It allows for instant tax relief and can reduce tax bills by up to 25p for each £1 spent, without a limit to the amount of spending that qualifies.
Additionally, the deduction amount can be greater than the cost of the asset. However, it is important to be aware of what happens when the asset is sold, as an immediate balancing charge is incurred on any money made from the sale. This charge is used to work out taxable profits, and if the asset is sold before the super-deduction period finishes in 2023, the charge can be raised to 130%, thus negating any relief already given. Our team can provide advice to see if the new relief can be to your benefit.
Modifications that have occurred since the budget was approved
When it was first declared, the super-deduction and SRA did not cover leased plant and machinery. Businesses with commercial landlords were particularly affected by this. However, a new adjustment to the regulations has made ‘background’ plant and machinery in leased property eligible. This covers assets such as lifts in high-rise office buildings, which are necessary for the building to perform its intended duties. Most background plant and machinery falls into the integral feature group, and so it is likely to be accepted for the SRA instead of the super-deduction. If you would like to know more, please get in touch with us.
Super-deduction planning points
- It is vital to be aware of the right time to make and dispose of investments. Our team can assist you in determining your replacement cycle so you can gain the maximum tax benefits and claim eligible capital allowances.
- We can look into the possibility of you taking advantage of reliefs such as the AIA and research and development allowances, to work out which claims would be the best for your situation.
- It is possible that the temporary regulations on reclaiming losses could be taken advantage of, as the super-deduction could create or boost such a loss, resulting in a tax refund.
- What is the connection between the Annual Investment Allowance (AIA), super-deduction, and Structures and Buildings Allowance (SRA) for you? This might be especially important if you intend to make a large outlay between the time when the AIA reduces to £200,000 and the day of 31 March 2023, when the super-deduction and SRA end.
- Reviewing the increase to the rate of Corporation Tax from 1 April
2023, when the super-deduction ends. As the rate of Corporation Tax
increases, so the AIA will give tax relief at 25%, rather than the current
19%. We can calculate the implications of this for your business,
weighing up relief now at 19%, as against relief at 25% from 2023, in
the light of projected profitability and cashflow. - Keeping precise records is essential to validating assertions, calculating balancing fees, and is especially critical to claims that utilize the super-deduction. We can provide guidance on what is necessary.
How we can help
Proactive preparation will undoubtedly result in the most ideal solutions. If you are considering making a large purchase, please contact us so that we can help you make the most of the available tax advantages.
If you’re looking for accountants Bolton, please get in touch with us.