A welcome extension to the tax reliefs available on plant and equipment

Published by John Walsham on 16 November 2020

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Cash flow continues to be a priority for most business owners. However, many must still invest in plant and machinery (P&M), either to maintain or grow their business.

Tax relief is typically obtained on qualifying capital expenditure by claiming Capital Allowances (CA’s). CA’s are a form of tax deductible depreciation, with the tax deduction based on a set percentage of the asset’s cost.

The current main CA’s rate is 18% of an asset’s cost, although certain types of expenditure may only qualify for a lower rate. The tax relief is calculated on a ‘reducing balance’ basis and so it takes many years to obtain a full tax deduction for the cost.

To encourage capital investment, businesses have been able to significantly accelerate the timing of tax relief by claiming an Annual Investment Allowance (AIA). The AIA allows a 100% tax deduction on qualifying capital expenditure, up to a statutory limit, with any excess eligible for CA’s at the lower rates.

A broad range of capital expenditure may qualify for the AIA, with the notable exception of cars (although certain cars with very low C02 emissions can still attract a separate 100% ‘First Year Allowance’).

Since 1 January 2019, the AIA limit had been temporarily increased to £1 million. This generous limit was due to expire on 31 December 2020, at which point it was to reduce to £200,000 per year.

This looming deadline meant that business owners needed to consider the value and timing of the accelerated tax relief against the cost of financing capital acquisitions.

In a welcome move, on 12 November 2020, the UK Government announced that the £1 million limit is to be extended by a further twelve months. This means that the generous AIA limit will continue to apply to qualifying capital additions made prior to 1 January 2022.

The extension in the temporary increase in AIA will be welcomed by businesses with higher levels of capital expenditure and there are planning opportunities and pitfalls:

  • Very broadly, businesses which are planning on incurring significant qualifying capital expenditure are likely to obtain tax relief much sooner by making acquisitions on or before 31 December 2021.
  • An AIA is available for each 12 month accounting period. Therefore, where additions may exceed the limits, it can be beneficial to split the timing of expenditure to qualify for the maximum available AIA over two accounting periods. With careful planning it may be possible to claim up to £2 million of AIA, in certain circumstances.
  • The availability of the full AIA is dependent upon the accounting period of the busines concerned. Where there is a change in the AIA rate within an accounting period, the AIA limit is broadly time apportioned, but there is complexity in how the rules operate. This may be of relevance for businesses with accounting periods ending after 1 January 2022, as the AIA rate will reduce on this date. This may require careful timing of significant capital expenditure to ensure that the AIA is not wasted.
  • Setting aside the benefits of the AIA, consideration should always be given to whether expenditure is incurred before or after the end of an accounting period to maximise the tax position.

This can ensure that any additional tax relief from the AIA is crystallised in the optimum period. For instance, it may be better to enhance a tax loss, which might be carried back or surrendered as much as reducing taxable profits of a later period.

Planning can potentially assist in deferring the accounting period in which a company is required to pay its corporation tax through quarterly instalments, aiding cash flow over the longer term.

  • There are many complexities within the CA rules. These include the classification of qualifying assets and rules concerning the date of acquisition for CA’s purposes, which is vital when claiming the AIA.
  • Advice should be obtained before making any significant capital purchase to ensure that relief is optimised, as anticipated.

Financing asset purchases

If you are considering making an asset purchase, do not ignore the opportunity to make use of the Government loan schemes while they are still available. Borrow now interest free for 12 months and remember you can access Coronavirus Business Interruption Loan Schemes (CBILS) for asset finance and you can have more than one CBILS so long as you do not borrow more than £5m in total. Also do not miss the opportunity to refinance existing borrowing over longer and better terms together with a capital repayment holiday for at least twelve months.

The steps to take to find the best funding for your asset purchase is to approach your existing lender, they have built a relationship with you over time and have detailed information about how your business and accounts have been managed.

Kreston Reeves has access to over 100+ prospective lenders via an online funding platform. If your existing lender is unable to support you, it is worth getting in touch with us.

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