Tax relief for “capital” purchases, e.g. equipment, is governed by different rules to those for day-to-day purchases and overheads. The rules often result in tax relief for capital purchases being overlooked. What steps can you take to identify and claim any lost tax relief?
Capital allowances
Understanding the rules for tax deductions relating to the purchase of plant and machinery (capital allowances (CAs)), is one of the dark arts of tax. Consequently businesses often miss out on CAs they’re entitled to. Aside from the technical tax issues, the main reason is the mismatch between accounting and tax rules, especially for plant or machinery which is fixed to buildings.
Plant, machinery or structure?
For accounting purposes some types of expenditure are treated as improvements to a premises while for tax purposes they count as plant or machinery. This can be the difference between a tax deduction from profits or merely a potential deduction if and when you sell the premises.
What to look for?
Typically, the expenditure which slips through the net is for integrated equipment, e.g. water, heating and lighting. These are known as “integral features”. Also overlooked is the cost of structural work to accommodate equipment. Unless the person handling your firm’s tax spots the expenditure and understands the CAs rules, tax relief could be lost forever. However, an unusual but beneficial aspect of CAs is that it’s never too late to make a claim.
Tip. If you’ve installed equipment which required changes to your premises, or fitted new water, electrical or heating systems, etc., it’s worth reviewing your records to make sure all the CAs you’re entitled to have been claimed.
Tip. There’s usually no time limit for claiming tax relief for the purchase of plant and machinery, although there can be one in some circumstances.
Trap. Where you acquired integral features with a building purchased after 31 March 2014, you can only claim CAs if the person you obtained the property from has already recorded them as qualifying assets.
Expenditure must still qualify
A deduction for previously missed expenditure is only allowed if it qualifies for CAs under the rules which apply for the accounting period for which you make the claim. Plus, you must still own the items and be using them in your business for that accounting period. Another drawback to claiming CAs late is the effect it has on the amount of relief you can claim for an accounting period. Instead of being entitled to claim CAs for the full cost of equipment against a single year’s profits by means of the annual investment allowance (AIA) or first year allowances (FYAs), your claim must be spread over a number of years.
Amount of capital allowances claimable
If CAs can’t be claimed in full for the accounting year in which the expense was incurred, they qualify for writing down allowances (WDAs) instead. These only allow tax relief at 6% or 18% of the expenditure per year on a reducing balance. While it can take decades to obtain tax relief in full it’s better than leaving CAs going begging.
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.