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Optimising Your Capital Allowances
17th December 2013 by
I always seem to be talking to clients about the best way to deal with their capital expenditure, especially when it comes to plant and machinery such as trucks and trailers. Over the last few years, the Writing Down Allowances (WDAs) for such expenditure have been reduced twice; using WDA alone it now takes 12 years to get tax relief for 90% of the expenditure, and for items which fall within the “special rate pool” (which includes higher emission cars, long-life assets and integral features within buildings) it takes a staggering 28 years! It has therefore become more important to use a number of tricks to ensure maximise tax relief.
Annual Investment Allowance
Annual Investment Allowance (AIA) is effectively a 100% first year allowance for business expenditure on qualifying plant and machinery. It isn’t available for some items such as cars.
The current maximum AIA of £250,000 per annum is in place for the two year period ending on 31 December 2014, after which it is scheduled to fall to its previous level of £25,000. Complicated transition rules apply, and it is worth discussing how much AIA is available to your company in what period. However, if you are planning major capital expenditure on qualifying items, optimising the timing is key.
Short Life Assets
Another idea is to enter into a “short life asset” (SLA) election in respect of assets which you expect to be sold within eight years. This means that rather than remaining within the main pool of expenditure (and continuing to slowly get WDAs even after disposal), the item can be kept in a separate pool, and either a balancing allowance or balancing charge made on disposal. If the item is kept more than eight years it reverts to the main pool.
The trick is to consider whether you expect the item to be sold for less than its tax written down value is likely to be at the time, i.e. the claim is more appropriate for equipment which drops in value rapidly.
This opportunity is all too often overlooked; the eight year limit was only increased from four years in 2011, and many companies still fail to consider this carefully because assets which were disposed of within four years were much less common.
As Capital Allowances have fallen, leasing has become more popular. This is because putting aside higher emission cars, with a lease agreement, you should get full tax relief over the duration of the lease, rather than waiting many years with an actual acquisition. Of course, tax reliefs have dropped for the leasing companies, which might make leasing more expensive in gross terms than it has been in the past, but it is worth finding out what deals you an negotiate and working out the post-tax cost compared with other methods of finance.
This information is given by way of general guidance only, and no action should be taken solely on the basis of the information contained herein. No liability is accepted by the firm for any actions taken without seeking appropriate professional advice.
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