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Business Tax  •  capital allowances  •  Personal tax  •  Tax Planning  •  Tax Relief

Tax plan ahead if you are thinking of buying new kit for your business

By RJP LLP on 21 July, 2011

April 2012 will be upon us in no time and brings with it a significant reduction to the reliefs available under the current capital allowances legislation.  It’s currently possible to write off 100% of the cost of acquiring new business equipment (classified as plant and machinery) to the value of £100,000 as a tax deductable expense in the year of expenditure.

However, after April next year, the limit of the Annual Investment Allowance (AIA) as it is called, will be dropping from £100,000 to £25,000.  The actual dates the changes take effect vary slightly - 1st April for companies and 6th April for sole traders and partnerships.

Apparently, the objective of this change is, according to the Treasury, to “create a competitive corporate tax system and to support enterprise and long-term economic growth”…. which in turn will “refocus the simplification and cash-flow benefits it offers on smaller businesses”.  In reality, it’s to finance the cuts to the main rate of corporation tax - a move that is more beneficial for larger companies.   Rationale aside, for business owners mulling over whether to splash out on new IT assets, machinery and the like, it’s worth thinking carefully about the timing of any expenditure and planning ahead to minimise the tax implications.

The date on which the expenditure is deemed to occur is the critical one and advice should be sought in order that optimum reliefs can be claimed. A further issue you may want to consider is whether to adjust your accounting dates to be able to take full advantage of the maximum £100,000 should you require the full tax relief.  This is because the wording of the Finance Bill has been adjusted so that where an accounting period spans a tax year, it may result in a restriction of the amount of tax relief available.  For sole traders and partnerships, changing accounting periods is more straightforward to undertake than for a limited company.  It is still feasible for companies, albeit a little bureaucratic, but careful tax planning should underpin the final decision made.

Quick recap: Which plant and machinery investments are covered by AIA?
No other aspect of capital allowances is affected, only plant and machinery covered by AIA.  All the usual tools, machinery, vehicles and other equipment you might buy for your business will generally qualify for plant and machinery allowances. Common examples of what’s covered by the AIA include: vans, tools, furniture, computers and machinery.

In addition, the assets purchased must be wholly used for the purpose of the business, or, if partially used, then a decreased level of AIA may be claimed.You must also own the asset in question as a result of incurring that expenditure, making leased items non-tax deductible.  This is rather a shame for small business owners looking to manage cash flow as there are some very good 0% finance opportunities for technology related investments, such as Cisco’s EasyLease programme.

Other restrictions to the use of AIA also apply and it is worth discussing any forthcoming investments with your tax adviser before going ahead.

Posted by Paul Webb, tax partner at Surrey tax and accountancy firm RJP

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