The cost of equipment, especially larger items, often comes with extra costs. When and how can your business claim tax deductions for these?
The meaning of “on”
Small seemingly insignificant words can have a big impact in tax. For example, a few years ago HMRC amended its internal capital allowances (CAs) manual to make clear its view of the meaning of “on” and “on the provision of”. These simple words are vital in determining whether or not you’re entitled to claim CAs (HMRC’s equivalent to the cost of depreciation included in your accounts) for an expense linked to the purchase of equipment.
The importance of “on”
HMRC’s manual makes the point that CAs can only be claimed “on” certain types of expenditure, i.e. plant and machinery (equipment) and other assets specified in the legislation. Expenditure related to the purchase of equipment etc. that’s remote or indirect isn’t “on” it and so doesn’t qualify for CAs. This fine distinction can rule out any tax relief.
Example. Acom Ltd purchases a heavy piece of machinery for £25,000. The delivery charges are £500 and the installation, which is quite intricate and costs £3,500, involves the construction of containing walls. Acom paid the costs using a bank loan for which it incurred an arrangement fee of £350. There’s no question over Acom’s entitlement to CAs for the cost of the machinery and the delivery charges. The installation costs might wholly or partly qualify for CAs if not under the main allowance then under the deduction for structures and buildings (the SBA). HMRC considers these to be “on” qualifying expenses. However, CAs can’t be claimed for the loan fee because it’s too remote from the purchase of the equipment.
Accounting rules
The question of whether or not to claim CAs is made more difficult because of the difference between accounting and tax rules. While your bookkeeper or accountant may record an expense in the business’s records as “capital” because that’s what the accounting rules require, the tax rules mean that it might not qualify for CAs. This could result in missing out on a tax deduction, claiming one where it’s not due or indefinitely delaying tax relief.
Bookkeeping – devil’s in the detail
With capital costs more than any other type of expenditure the importance of good and accurate bookkeeping shouldn’t be understated. Not only can it protect you from HMRC investigations (conversely, bad bookkeeping can trigger one) but it makes it easier for you or your accountant to claim the correct tax deductions and reliefs for your business, including CAs.
Tip. Unless your business rarely incurs capital expenditure or it’s insignificant it’s good practice to keep a fixed asset register. This can help you or your bookkeeper to identify and keep track of exactly what has been recorded as capital in your business records and ensure CAs are claimed where they can be.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.