tax

Capital Allowances, Annual Investment Allowance, and the Super-Deduction

Capital Allowances, Annual Investment Allowance, and the Super-Deduction

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    When you spend money buying certain items of “plant and machinery” for your business, HMRC allows you to offset some of that expenditure against your profits. If you’re a limited company, this will reduce the amount of Corporation Tax you pay.

    If you’re a sole trader or a business partnership you don’t pay Corporation Tax, but you can still offset certain purchases against your profits to reduce the personal tax you pay. The rules surrounding these allowances are complex, and we always recommend you speak to an accountant to ensure you are claiming the correct amount of tax relief regardless of your business structure.

    These tax breaks are known as capital allowances. The description covers a wide area and is applied to the investment your business makes in assets with a life of more than 12 months, which is also known as capital expenditure. Capital expenditure is quite different to the usual day-to-day expenses your business incurs, as covered by our expenses articles for sole traders or limited companies.

    The majority of businesses, or at least their accountants, will know that capital allowances are available on capital expenditure such as “plant and machinery” used in the business. What the majority don’t realise is just how broad the definition of “plant and machinery” actually is, or that a new “super-deduction” tax relief has increased the value of the tax break available to limited companies.

    What is “plant and machinery”?

    HMRC’s rules have led to some interesting debates over the years over the items of expenditure you can classify as plant and machinery. Machinery is fairly self-explanatory (mechanical items), and it stretches to items that people may not necessarily expect – mechanical doors, lifts, air conditioning equipment and so on.

    Plant, on the other hand, is an extremely broad term and may mean different things for different businesses. Qualifying items have to be assessed on a case-by-case basis. Examples that HMRC have allowed in the past include demountable partitions, sports surfaces, suspended ceilings, amusement park rides, and artwork on office walls.

    Many businesses fail to take full advantage of capital allowances when preparing their accounts, so consulting an expert could save you a packet.

    HMRC rules say that: “You can claim capital allowances when you buy assets that you keep to use in your business,” such as:

    • equipment
    • machinery
    • business vehicles, for example, cars, vans or lorries.

    For small businesses, this means you can claim on specific items of expenditure such as laptops, computer equipment and servers, office furniture and even the electric charging point for your business vehicle if you have one.

    Claiming Capital Allowances – how it works

    In principle, claiming capital allowances is a simple process. You need to check whether the purchases qualify for capital allowances and then report them to HMRC when you file your Corporation Tax return for your limited company. If you’re self-employed, you include the claim on your annual Self Assessment tax return.

    HMRC will use this information and your tax status (eg. have you paid tax, are you paying personal tax or Corporation Tax and at what level) to calculate how much tax relief you’ll receive.

    You can sometimes claim capital allowances for items that you owned before you started using them in your business. Again, there are strict rules surrounding the transfer of such assets into a business, and you should consult an expert before making a claim.

    If you sell an asset after claiming capital allowances on it, you may need to repay some of the tax relief received. You should speak to an accountant for individual advice, or find out more on the Gov.uk website.

    What is the Annual Investment Allowance (AIA)?

    The Annual Investment Allowance (AIA) was introduced in April 2008. The AIA allows most businesses, regardless of their size, to claim up to the limit set by HMRC each year on their expenditure on plant and machinery. The permanent limit of the AIA was set at £200,000 on 1st January 2016. From 1st January 2019, the AIA was temporarily increased to £1 million, this increased limit is due to be in place until 31st December 2021.

    The AIA allows for a 100% capital allowance on qualifying expenditure on plant and machinery up to the annual limit. This means if your business buys certain types of equipment that qualify for the AIA, you can deduct 100% of the cost of that asset from your business’s profit before you work out how much tax is due on that profit. Those assets that qualify will receive tax relief on the full value of the item. Those assets that do not qualify for AIA, will normally receive tax relief based on their pool type.

    If your business is VAT registered, you can claim the AIA on the total cost of the asset less any VAT you can reclaim on that asset. If your business isn’t VAT registered, you claim the AIA on the total cost of the asset, including VAT.

    While most businesses are able to claim the AIA in respect of their expenditure on plant and machinery, you cannot claim AIA on:

    • cars
    • items you owned for another reason before you started using them in your business
    • items given to you or your business.

    If you can’t use the AIA, your business may be eligible for another type of capital allowance, known as a writing down allowance (WDA), at either the main or special rates, which defer relief for most of the expenditure to future tax periods. You can use the writing down allowance if:

    • you’ve already claimed AIA on items worth a total of more than the AIA amount
    • the item doesn’t qualify for AIA (for example, cars, gifts or things you owned before you used them in your business).

    There’s further information on AIA on the HMRC Gov.uk website. Crunch clients can speak to one of our expert accountants for more help with this.

    What about the new super-deduction tax relief?

    From 1st April 2021, a new ‘super-deduction’ Corporation Tax relief was announced for limited companies. The super-deduction is not available to sole traders, who can continue to use the Annual Investment Allowance (see above).

    The super-deduction offers 130 per cent first-year relief for qualifying expenditure on plant and machinery from 1st April 2021 until 31st March 2023, and a 50% first-year allowance for special rate assets.

    For most business equipment, there’ll be a super-deduction of 130% of the expenditure. Normally such expenditure would fall within a company’s AIA which provides for relief of only 100%.

    By way of example, a small business purchasing a qualifying asset (such as a laptop) for £1,000 after 1st April 2021 will now receive £247 in Corporation Tax relief under the new ‘super-deduction’ tax relief. Under the AIA, the equivalent amount of corporation tax relief was £190.

    If your company uses external finance to invest in plant and machinery through hire-purchase type arrangements, you can claim the super-deduction tax relief, provided payments are being made to acquire the asset, and there’s an expectation that legal ownership for the asset will pass to your business in the future.

    You can’t claim the super-deduction relief on a lease arrangement where there’s no expectation, or contractual requirement, that the asset will pass into the direct ownership of your business. The asset is usually returned to the lease company in such circumstances.

    The super-deduction is not available for purchases of cars, or for purchases of any second-hand or previously owned items. If assets that have claimed this super-deduction are subsequently sold, there will be tax implications on the sale as follows:

    • for periods ending on or before 31 March 2023, proceeds are taxed at 130% of the amount received, with periods straddling 1 April 2023 paying a hybrid rate
    • for periods starting on or after 1 April 2023, proceeds remain taxable at 100% of the amount received.

    When recording asset purchases in Crunch, nothing has changed. Your Crunch accountant will claim the super-deduction tax relief for qualifying assets purchased after the 1st April 2021.

    Want to know more? Speak to an accountant!

    If you want individual advice on how to claim capital allowances for your business, then you should speak to an accountant. Our Crunch clients can simply contact their client management team for support. If you’re using our Crunch Free software, you could book one of our Ask an Accountant sessions for guidance on how you could claim for capital allowances.

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