Generally speaking, the business expenses you incur are allowable against your profits. But, when it comes to fixed asset purchases (things like machinery, equipment or vehicles that typically last a few years), these purchases are treated slightly differently.
To reduce your tax bill when purchasing fixed assets, it is important to know what capital allowances are available and how you can use them effectively to enhance your tax planning. This is especially important, as some reliefs are only available on a temporary basis, such as the Super Deduction Scheme (SDS).
What are capital allowances?
Fixed assets are classed as items of equipment that will be used in the business for more than a year. Some common examples of fixed assets used within a business include – office furniture, machinery (e.g. a bottling machine in a milk processing plant, or a printer used by a printing business) and company vehicles such as company cars and vans.
For accounting purposes, the cost of these fixed assets is spread over the expected life by calculating something called a depreciation charge each year. In other words, the value the item will lose over this time. However, from a tax perspective, the value lost by a fixed asset during the course of a year is ignored and something called a capital allowance can be claimed instead. In practice this means:
For tax purposes, the depreciation is added back (or disallowed) and ‘writing down allowances’ are claimed instead
There is a more generous Annual Investment Allowance (AIA), temporarily increased from £200,000 to £1,000,000 for qualifying expenditure on plant and machinery incurred during the period from 1 January 2022 to 31 March 2023. The cost of most asset purchases up to that total can be claimed in full, in the year of purchase. The main exceptions are cars and items you owned for another reason before putting them into the business.
For some assets, 100% First Year Allowances (FYA) are available. These include:
New vehicles with Nil CO2 emissions
Specified energy-saving equipment
Specified water-saving equipment
For everything else you might purchase as a fixed asset, the costs are allocated into various pools depending on the type of asset, and Writing Down Allowances (WDA) calculated on the pool value on a reducing balance basis. These include:
Special Rate Pool 6% rate – Cars (new or used) with CO2 emissions > 50 g/km, Integral fittings incorporated into commercial buildings (lifts, electrical and water reticulation, air conditioning, heating equipment), long-life (>25 years when new) items over £100K annual spend. Long-life excludes structures and buildings.
Main Rate Pool 18% rate – everything else. Note as specifics this includes cars with CO2 emissions >0 and <50 g/km.
Structures and Buildings Allowance (SBA) – the SBA offers a 3% flat rate for 33.33 years on non-residential buildings only, but not on land.
What is the super-deduction capital allowance?
The Super Deduction Scheme (SDS) was announced in Spring Budget 2021, with the aim of encouraging UK companies to invest in fixed assets, growth and the recovery of the business economy.
The SDS is the single biggest tax incentive any UK government has ever given for business investment into qualifying assets and equipment. If you are looking to purchase plant machinery, vehicles, office equipment, solar panels or other assets or equipment that qualify for the SDS, then this is definitely a scheme worth taking advantage of.
The SDS offers a substantial capital allowance to incorporated businesses on any qualifying assets, reducing the companies corporation tax bill, which in turn frees up cash to re-invest back into the business to support future growth.
NOTE: The SDS only applies to UK limited companies, not to unincorporated businesses such as self-employed businesses or sole traders.
From April 2021 to March 2022 the allowances have been increased as follows:
Most items which would have qualified for AIA or for inclusion in the main rate pool will attract a FYA of 130%.
Items that are included in the Special Rate Pool will be eligible for a FYA of 50%.
Both FYA 130% and 50% exclude cars, equipment purchased to lease out, second hand items, purchases contracted for before 03 March 2021.
*ALERT* The SDS will no longer be available for expenditure on or after 1 April 2023. Transitional rules will apply in respect of expenditure for businesses with accounting year ends that do not fall on 31 March.
Talk to us about making use of capital allowances
If you’re thinking of purchasing capital equipment, it is worth being aware that in some cases, the tax benefit can be spread over a number of years. With the temporarily enhanced deductibility, this will have a positive short-term impact on both your tax charges and your cashflow.
We can advise you on the tax treatment of different types of assets and, if external funding is required, can help you prepare business plans and finance applications.
Get in touch talk through your capital equipment plans.