This article focuses on the tax relief available on the acquisition of assets such as plant and equipment, commercial vehicles and motor cars. These are known as capital allowances and although the rates vary according to the category of asset, the rules are broadly the same for sole traders, partnerships and limited companies.
To ensure that all entities are treated consistently, the same capital allowance rules apply to all sizes of businesses and are given instead of accounts depreciation which is treated as a disallowable expense for tax purposes.
The rates mentioned in this article generally apply to the tax year 2012/13 but are of course subject to change in subsequent budgets.
Annual Investment Allowance (AIA)
From April 2012 the amount of the Annual Investment Allowance available to a business has been reduced from £100,000 to £25,000 which effectively provides a 100% allowance in the year of purchase on the cost of the following assets:
- Plant and machinery
- Computers and office equipment
- Office furniture
- Commercial vehicles
Where the total amount spent during a 12-month period exceeds the £25,000 AIA then the balance only qualifies for an 18% writing down allowance (WDA). The balance of any expenditure remaining is then carried forward to the next period on which subsequent WDAs at 18% are claimed on a reducing balance basis.
In his 2012 Autumn Statement the Chancellor announced that for the two year period: 1 January 2013 to 31 December 2014 the Annual Investment Allowance is to be increased ten-fold from £25,000 to £250,000.
Where expenditure is incurred on ‘integral features’ within a building (such as electrical lighting, hot and cold water systems, air conditioning and lifts) then to the extent that they cannot be matched against the £25,000 AIA, they only qualify for an 8% WDA as part of a ‘special rate pool’. Note however they can be allocated against the AIA in priority to other plant and equipment items, thus helping to minimise the effect of the lower 8% WDA compared to the normal 18%.
Cars do not qualify for the AIA but are treated separately as follows according to their CO2 emissions:
- Up to 110gms/km ~ 100% first year allowance (rather than being linked to the AIA)
- Between 111 and 160gms/km ~ 18% WDA (on a reducing balance basis)
- Over 160gms/km ~ 8% WDA (on a reducing balance basis)
Note that from April 2013 it has already been announced that the 110 threshold will reduce to 95gms/km and the 160 threshold will reduce to 130gms/km.
Where a car is used privately by a sole trader or partner, then the allowance claimed is restricted to the percentage of business use.
Where however a car is used privately by a director or an employee the allowance to the company is given in full without any adjustment but a taxable benefit will arise on the individual director or employee. Calculation of the benefit is based on a combination of the car’s list price and a percentage scale based on its CO2 emissions.
Timing of Expenditure
Capital allowances are generally available on an asset for the year of purchase provided the expenditure is incurred prior to the year end. However, care needs to be taken when planning acquisitions towards the end of an accounting period to ensure that:
- The planned expenditure and related capital allowance claim is not delayed until the next period, thus resulting in a higher tax liability for the current period with an adverse effect on cash flow.
- Where the AIA limit has already been utilised, consideration should be given to deferring the expenditure until early in the next period when a further £25,000 AIA will become available.
Assets acquired under Hire Purchase (HP)
Purchasing an asset on HP can often be an effective way of financing a purchase where cash flow prevents the acquisition of an asset outright.
Although legally an asset acquired under HP is not regarded as owned until the final payment is made, for capital allowances purposes it is treated as being acquired for its normal cash price at the date of the deposit.
To ensure that capital allowances on an HP-acquired asset are claimed at the earliest opportunity it should be noted that the asset must be brought into use before the end of the accounting period to make any claim for that initial period.
Interest paid under a HP agreement is claimable as a tax deductible revenue expense as it arises.
A Trap for the Unwary
For limited companies care needs to be taken when purchasing a car with a CO2 over 160gms/km where the car is the only asset within the ‘special rate pool’. On disposal of the car, although the sale proceeds reduce the pool value, the remaining pool must continue to be written down at 8% indefinitely even though the asset is no longer owned by the company! There are legitimate ways in which this unfortunate situation can be avoided.
Other Enhanced Allowances
Note that 100% capital allowances are also currently available on certain research & development capital expenditure, electric cars and certain goods vehicles, energy saving equipment and plant & equipment purchased in designated Enterprise Zones.
Lease v Buy Decision
It is fairly common for business assets, particularly cars, to be leased rather than purchased but the tax treatment is quite different and full details of the ‘lease v buy’ decision will be the subject of a separate forthcoming tax article.
Further details and guidance can be found on HM Revenue & Customs website at the following link:http://www.hmrc.gov.uk/capital-allowances/index.htm