Are You Making the Most of Capital Allowances?

Purchasing plant and machinery

Businesses looking to purchase capital equipment are able to claim tax relief in the form of capital allowances. Here we outline some of the key details.

What is the Annual Investment Allowance?

Businesses purchasing plant and machinery are able to make use of the Annual Investment Allowance (AIA), which allows the costs for equipment, machinery and business vehicles (excluding cars) to be deducted from your profits before tax. The maximum annual amount of the AIA is £200,000. The AIA applies to businesses of any size and most business structures, but there are provisions to prevent multiple claims.

Plant and machinery includes items such as machines, equipment, furniture, certain fixtures, computers and similar equipment you use in your business. However, certain items do not count as plant and machinery. These include buildings, land and structures, and items that you lease. There are special rules for cars and some specific ‘environmentally friendly’ equipment.

Enhanced Capital Allowances

In addition to the AIA, a 100% first year allowance is also available on energy-saving or environmentally friendly equipment. A separate Enhanced Capital Allowances (ECA) scheme is available for new electric and low carbon dioxide (CCb) emission cars (up to 75 g/km – reducing to 50 g/km from April 2018) and new zero emissions goods vehicles (up to 31 March 2018 (corporates) or 5 April 2018 (others)). They also qualify for the 100% first year allowance.

Expenditure pooling

Where purchases exceed the AIA a writing down allowance (WDA) is due on any excess in the same period. This WDA is currently set at a rate of 18%. This is the main rate pool and it is available on any expenditure incurred in the current period not covered by the AIA or not eligible for the AIA as well as on any balance of expenditure remaining from earlier periods.

Certain expenditure on building fixtures, known as integral features (e.g. lighting, air conditioning, heating, etc.) is only eligible for an 8% WDA so is allocated to a separate ‘special rate pool’, though integral features do qualify for the AIA.

Motor vehicle expenditure

With regard to capital allowances, special rules govern the treatment of expenditure on vehicles. Cars do not qualify for the AIA, but other specific types of vehicle are treated as pool, plant and machinery.

For business cars, a vehicle’s level of C02 emissions plays a key role in its capital allowance treatment. New low emission cars acquired between 1/6 April 2015 and 31 March/5 April 2018 and not exceeding 75 g/km C02 emissions will be allocated to the main rate pool, and will be eligible for a 100% allowance. Vehicles not exceeding 130 g/km C02 emissions will also be allocated to the main rate pool, but will be eligible for an 18% WDA. Those that exceed 130 g/km C02 emissions will be allocated to the special rate pool, and will be eligible for an 8% WDA.

From April 2018, new capital allowance rules for cars are set to take effect.

How do I make a claim for capital allowances?

Businesses are required to make a claim for capital allowances through their tax return. Unincorporated businesses must make a claim within 12 months after the 31 January tax return filing deadline. Companies must ensure that their claim is made within two years of the end of the accounting period.

If you are considering investing in plant and machinery, please talk to us first as we can help to ensure that you time your purchase to receive the maximum tax benefit.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

Year End Tax Planning Tips For Companies

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Corporation tax is set to reduce to 19% with effect from 1 April 2017 but opportunities still remain to reduce and defer corporation tax liabilities. Here are some you may wish to consider.

MAXIMISE CAPITAL ALLOWANCE

The annual investment allowance (AIA) provides 100% tax relief for qualifying expenditure incurred up to a limit of £200,000 for 12 month periods starting on 1 January 2016. The allowance can only be claimed in the period in which the expenditure was incurred. You should be aware that cars are excluded from this relief.

If you have a 31 March year end, it would be sensible to review capital expenditure plans and consider bringing forward any purchase to before 31 March, thereby utilising this allowance which might otherwise be lost.

On the other hand, if the £200,000 limit has been exceeded, then further purchases should be delayed until after the year end, if possible.

PENSION CONTRIBUTIONS

Relief for employer contributions is given in the chargeable accounting period in which the contributions are paid. In most cases it is sensible to ensure that all contributions are paid before that date in order to accelerate the relief. In the context of a 31 March year-end, if the payments are made before 31 March, relief is given at 20%. This would reduce to 19% for contributions paid after this date.

DEFERRING INCOME OR PROFITS

Consider delaying a transaction to shift profits forward into the next financial year, so as to delay by one year any corporation tax payable. This will also have the effect of reducing the corporation tax payable from 20% to 19%.

There are several ways of deferring income to the next tax year. Sales could be pushed forward to the next period, selling goods on consignment, or if a seasonal trade, changing the year end to exclude a more profitable period or to include a loss-making one.

CLAIM RESEARCH & DEVELOPMENT TAX CREDITS

Companies that have undertaken research and development work could qualify for generous tax reliefs. For an SME, for every £1 of qualifying R & D expenditure, an additional £1.30 is allowed in the tax computation. A loss making SME may be able to surrender the loss arising as a result of the R & D claim for a cash credit of 14.5%

CLEAR OVERDRAWN LOAN ACCOUNTS

The tax charged on a company loan to a “participator” is equal to 32.5% of the amount of the loan outstanding at the year-end, unless the loan has been repaid or cleared within nine months of the end of the accounting period. Companies should therefore review outstanding loans and consider clearing them within the nine months to avoid the tax charge.

CONSIDER ROLL OVER RELIEF

Any company that has realised gains on the disposal of land and buildings used in a trade should consider whether the corporation tax on this can be deferred by way of business asset roll over relief. This may be available if the company reinvests all of the disposal proceeds in new qualifying assets, either within 12 months before the disposal or up to 3 years after. Partial relief could be available if all the proceeds are not reinvested.

For further information please contact the tax team at Green & Co.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

Business groups set out Spring Budget priorities

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Business groups have outlined their priorities for businesses and the economy ahead of the 2017 Spring Budget. 

In a letter to Chancellor Philip Hammond, the Confederation of British Industry (CBI) called on the government to ‘back business’s growth ambitions’ to help build prosperity across the UK, and to work alongside firms to ‘prioritise stability’ during periods of economic uncertainty.

The CBI also urged the government to tackle the UK’s ‘outdated’ business rates regime and limit its ‘growing burden’ on businesses.

Echoing the call of the CBI, the British Chambers of Commerce (BCC) also recommended that the government take action on ‘delivering real reform’ to the business rates system. It called for HMRC to abandon the ‘fiscal neutrality principle’ in business rates reform, suggesting that this acts as an ‘unacceptable barrier’ to the revision of the system.

In its submission, the BCC outlined its desire for the government to bring forward the switch from the Retail Price Index (RPI) to the Consumer Prices Index (CPI) to April 2017, instead of during 2020, as is currently planned.

Meanwhile, the Federation of Small Businesses (FSB) has advocated for a ‘pro-business’ Budget that supports self-employed individuals, urging the government to help more people start up in business. It also called for the government to ‘improve job creation and drive productivity across the nations and regions of the UK’.

In a radical move, the Institute of Directors (IoD) has claimed that the UK tax system is ‘not keeping up with the growth of self-employment and the digital economy’, and has called for the Chancellor to create a new Tax Commission when he presents his Budget. The IoD argues that the new Commission should investigate how tax applied to the self-employed could be brought into line with employees, and how online stores could be taxed fairly in relation to high street shops.

The Institute has also called for an increase in the Annual Investment Allowance (AIA) cap from £200,000 to £1 million and a consultation on ‘liberalising’ investment schemes for business start-ups.

The Chancellor will present the 2017 Spring Budget on Wednesday 8 March. Full coverage of the key announcements will be available on our website, so please visit regularly. 

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

Changes to Annual Investment Allowance from January

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Having concluded that a reduction to £25,000 would not be “remotely acceptable”, from 1 January 2016 the chancellor has set the Annual Investment Allowance at £200,000 – “it’s highest permanent level.”

For those businesses whose financial year is not in line with the calendar year transitional rules will apply and the Annual Investment Allowance will be apportioned according to the financial year end.

For example, a business with a 31 March 2016 year end will have an AIA of £425,000; nine twelfths of £500,000 totalling £375,000 plus three twelfths of £200,000 giving £50,000.

However, expenditure incurred from 1 January 2016 up to the accounting year end cannot exceed the proportion of AIA calculated for that period (£50,000). Therefore it you are spending more than £50,000 it may be worthwhile doing so before 1 January 2016, if you want to get relief for the full cost in the year of purchase.

For further information please contact Green & Co.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

Nick Park analyses the Budget on BBC Radio Wales

To find out what other announcements were made in  the Chancellor’s Budget, read our Budget Summary.

Budget 2015 and 2015/16 Tax Tables

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Our updated Tax Tables are available here – find out what the new rates mean for you.

If would like to  read our summary of the 2015 Budget, then please follow this link: Budget Summary 2015

The main issues include:

Farmers averaging – Farmers will be able to average their profits over five years instead of just two from April 2016.

Employer’s national insurance allowance – The employer’s national insurance allowance of £2,000 has been extended to 2015/16. Make sure you claim this on your payroll.

Help to Buy ISA – A new Help to Buy ISA will be introduced with the government providing a £50 bonus for every £200 of monthly savings up to a maximum of £3,000 on £12,000 of savings. The aim is to start the scheme from Autumn 2015.

Deeds of variation – The government will review the use of deeds of variation for inheritance tax planning.

For more tips, refer to the ‘think ahead’ boxes of our guide.

Please contact us if you need more information on these changes, or any other matter.

Prevention is better than cure!

Prevention is better than cure! – A saying that can often apply to reducing your tax bill.

Taking a proactive approach to your accounts can often be the simplest way to save you tax in a number of ways, for example:

Annual Investment Allowance (AIA)

The AIA allows you to claim 100% of the cost of assets, such as plant and machinery, in the first year of purchase, which in the past would have been split over a number of years. The AIA does have limitations on how much can be spent each year, therefore purchasing an asset just before or just after your accounting year-end could provide a completely different outcome on your taxable profits.

Capital Gains Tax (CGT)

Everyone has an annual allowance for capital gains before they are liable to CGT, and if you are planning to sell items such as shares, etc., that may incur a capital gain, the timing of your disposals could greatly effect the outcome of your CGT position.

Becoming a Limited Company

Though many people still view becoming a Limited Company as something associated with larger businesses, often the incorporation of a much smaller business can still prove to be beneficial for tax purposes, and with less extra administrative cost than you may expect.

Inheritance Tax

Unfortunately, Inheritance Tax planning can be a difficult subject to think about. More often than not, the majority of a person’s wealth is tied up in the property they own rather than money in the bank, and, as such, is unlikely to be spent during the retirement period. The writing of your Will, therefore, should not be the only thing to consider when deciding how your legacy should be allocated.

Submitting monthly VAT returns

If your business provides a product or service that is zero rated or exempt from VAT, whilst your expenditure does incur VAT, you may wish to improve the cash flow of your business by recovering your VAT on a monthly basis rather than once a quarter.

There are many reasons why we, as accountants, and you, as clients, should aim to be proactive when dealing with your financial affairs, and the aforementioned are just some of the more widely relevant reasons.

At Green and Co we regularly provide our clients with advice on these matters and more.

Being proactive is something that we strive to achieve so that our clients can make the right decisions from a position that is most tax efficient for their individual situation.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

Thinking of investing in large Plant and Machinery?

Take advantage of the Temporary Annual Investment Allowance Increase

Back in Autumn 2012, the chancellor made a surprise announcement to increase the maximum amount of annual investment allowance (AIA) from £25,000 to £250,000 from 1st January 2013 for a temporary period of 2 years. (Following which, the allowance limit will drop back down to £25,000 from 1st January 2015).

The AIA gives a 100% tax relief for the cost of qualifying plant and equipment, up to a capped annual limit -now £250,000.

HMRC have estimated that this accelerated tax relief measure will benefit 90,000 businesses, spending over £25,000 a year on qualifying plant and machinery. The increase in capital allowances will provide a cash-flow benefit, likely to be of help to small and medium sized businesses which will stimulate the growth of the economy.

It is important to determine the optimum time to make your investment so you receive the highest amount of tax relief available –as the annual allowance is allocated according to the date of expenditure and the accounting period in which it falls into. If your accounting period is 1st January 2013 to 31st December 2013, the full £250,000 applies. But if your business has an accounting period different to this, the allowance will be proportioned and the calculation is slightly more complicated. For example, if your business has a yearend of 31st March 2013, you will need to split the allowance between your accounting period, as follows:

1st April 2012 – 31st December 2012 = £25,000 x 9/12 = £18,750

1st January 2013 – 31st March 2013 = £250,000 x 3/12 = £62,500

In this accounting period, the business will be entitled to a maximum AIA amount of £81,250; however the expenditure must be spread over those two periods to gain the maximum advantage.

You will also need to remember to apportion your AIA again when this temporary £250,000 limit ends and your accounting period straddles the 1st January 2015.

Any qualifying expenditure exceeding the AIA annual limit is also entitled to further tax relief (known as ‘Writing down allowance’) at an annual rate of 18% or 8%, depending on the nature of the item purchased.

Please note the following items that do NOT qualify for AIA:

  • Cars
  • Plant and machinery previously used for another purpose, E.g. a computer used at home and introduced into your business
  • Plant and machinery gifted to your business
  • Expenditure incurred in the accounting period in which your business ceases

Whilst the government gave us little time to prepare for this, if your business is looking to grow and invest now is the time to take advantage. Before purchasing, please check how and when this will affect you. Of course, this has to fit within your business thinking and only if you have the available finance.

For further information and advice please contact us or check out HMRC’s guidance on their website http://www.hmrc.gov.uk/capital-allowances/plant.htm#3