The common forms of Capital Allowances available on plant and machinery currently comprise of; Annual Investment Allowance (AIA) of up to £200,000 per annum and Writing Down Allowance (WDA), set at 18% per annum.
These are the maximum allowances available, but it may not always be wise to claim them.
1.Wasted personal allowances
a) Sole trader - There is no compulsion to claim all of the allowances that one is entitled to, since one can disclaim all or part of the allowances due. It is not therefore usually sensible to claim relief where the remaining profit arising would in any event be covered by personal allowances. The advice would normally be to claim such relief as it would reduce profits to the personal allowance relief threshold. However it is not usually good tax planning to lose the benefit of personal allowances.
b) Partnership¹ - Claiming Capital Allowances may not be straightforward in a partnership with differing personal circumstances for each partner. A claim of capital allowances is made against partnership profits, which are then allocated according to the profit sharing ratio. Whilst this is not always easy, it is usually possible to come up with a compromise which benefits the majority of the partnership’s members. It is also important to remember that other reliefs (e.g. averaging) may be available to be claimed on an individual basis to mitigate any negative effects.
2. Preserving 'in year' losses
The effect of disclaiming Capital Allowances is to preserve the value of the plant and machinery pool. This will give rise to higher Writing Down Allowances (more tax relief) in future years and may also reduce any balancing charges which may arise on the disposal of assets, minimising the likelihood of a tax charge when assets are sold.
Losses brought forward may only be used against profits of the same trade, while losses made in a current year can be claimed against other sources (e.g. rental income and capital gains) subject to a £50,000 restriction for sole traders and partnerships. Current year losses are therefore much more flexible.
3. Business cessation²
Preserving the value of the plant and machinery pool is also very useful as a business approaches the end of its life. As mentioned above a high pool value brought forward will mitigate any balancing charges and may give rise to a balancing allowance, which could potentially feed into a terminal loss claim, where many options are available to maximise tax relief.
4. Hire Purchase agreements
If plant and machinery is purchased under a hire purchase contract you can only make a claim for the outstanding payments when the item is put into use. This rule has particular relevance to machinery with seasonal use, for example a Combine Harvester purchased in February is unlikely to have been used before the 31 March year end, and therefore only the payments made can be claimed in that tax year.
It is possible though that this rule may work to a trader’s advantage, in that the AIA relief may be legitimately split between the two tax years.
Think before you claim, you do not want to waste allowances.
A partial disclaim could lead to greater relief in the future, which could give rise to an in-year loss claim available against rental income and/or a capital gain.
If your business is approaching the end of its life, the flexibility of a terminal loss claim could be beneficial.
A split year AIA claim for the purchase of a seasonal machinery under HP could be advantageous.
¹ Please note that a mixed partnership which includes a limited company, a trust or estate is not entitled to claim AIAs.
² Annual Investment Allowance claim is not available in the final accounting period.
N.B Companies are not entitled to personal allowances
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