Naturally, when you buy equipment for your business determines when you’ll get the corresponding tax relief. But a few days one way or the other can make a big difference in the timing. How can you plan your purchase to obtain tax relief as early as possible?
Capital allowances
As you probably know, capital allowances (CAs) are the deductions HMRC allows instead of the depreciation charges included in your accounts for machinery and other assets owned by your business. Unlike depreciation, which is calculated using logical accounting rules, CAs are worked out using tax rules which include tricky issues regarding the timing of tax relief where you don’t pay for machinery etc. all at once. Understanding these can help you time your purchases to gain tax relief sooner rather than later.
Not HP
Deferred payment shouldn’t be confused with hire purchase or leasing arrangements. These types of contract mean you don’t own the machinery etc., at least not until you’ve paid a number of instalments, and there are special CAs rules which apply.
Basic rules
You must own the machinery etc. and use it for your business to be entitled to CAs. For example, if your business bought and owned a TV which is entirely for private use, there’s no entitlement to CAs even though your business accounts would include a charge for depreciation. Note. If a company owns an asset solely for private use by an employee, this counts as business use as it’s being used to reward an employee instead of salary. The company is entitled to CAs.
Deferred payment
The timing of payment doesn’t usually affect when you’re entitled to CAs. The trigger point for CAs isn’t the date you pay but when you become unconditionally obliged to pay.
Example. On 31 March 2022 Acom Ltd bought a new cutting tool. It charges this to its account with the supplier which it settles on 28 April. Acom’s financial year ends on 31 March. It can claim CAs for the new machinery in its accounts to 31 March 2022 (not the year ended 31 March 2023).
Tip. When planning purchases remember the rule which determines when CAs are triggered, i.e. when you become “unconditionally obliged” to pay for the goods. If in our example Acom had deferred the purchase until 1 April it would have had to wait another full year to claim CAs.
Trap. Where payment is due more than four months after purchase, a special rule applies. Entitlement to CAs is split.
Example. On 1 February 2022 Acom (from our previous example) signed an agreement to buy a second-hand truck for £18,000. It agrees payment in six equal instalments: one on delivery and the remainder on the first of each of the next five months. Acom can claim CAs in its 2022 accounts for £12,000 and the other £6,000 in its accounts to 31 March 2023.
Tip. Although the entitlement to CAs fall into two different financial periods the annual investment allowance (AIA) can apply to both.
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.