£20,000 Off Your Tax Bill?
April 2008 saw the introduction of a new tax allowance for businesses acquiring plant and machinery. Here we offer a few words of caution before you rush for the cheque book or hire purchase contract.
‘Plant and Machinery' covers a range of equipment used by a business, much more than any 'machinery' as we generally understand it. Some popular examples include commercial vehicles, loose furniture, alarm systems and technical apparatus. Signs, lifts, display cases radiators, shutter doors and cold stores can also qualify along with hundreds of other items too numerous to mention here.
The new Annual Investment Allowance covers most items under the plant and machinery “code” although there are exclusions, the most important ones being cars and plant/machinery used in residential letting.
The relief, on the face of it, is generous. It applies to expenditure incurred after 5 April 2008 for unincorporated businesses and after 31 March 2008 for companies.
It does not matter how small or large your business, or how many businesses you run, although if your companies are in a tax group then only one allowance is available for the whole group.
In essence, the allowance gives a 100% tax deduction for the first £50,000 of expenditure of the business and it is an annual allowance. A 40% taxpayer could see a tax reduction of £20,000.
If you spend more than £50,000 you may also claim a tax deduction representing a part of that excess, either 20% or 10% of the cost depending upon the nature of the asset.
Arguably therefore it is the small or micro business which really stands to notice the gain from the introduction of this allowance, especially if cash is tight and the assets are acquired under hire purchase in which case the interest charged is also 100% tax deductible.
The devil, as they say, is in the detail, and here’s the nub of the issue…..
If your business has a year end of 5 April [say as an individual] or 31 March [a company say] then you are certainly on to a good thing.
Conversely if your business has a year end date which is not around the end of March the first year of this allowance will be subject to restrictions.
A “small “ unincorporated business with a year end of 30 April 2008 which spends £50,000 on 29 April 2008 will be able to claim total allowances in year one of up to £14,901, which is just 29.8%of the £50,000 outlay. [This is less than the 50% First Year Allowance available under the previous regime.] The balance of outlay i.e. £35,099 will have to be written off in subsequent tax years.
A “small” unincorporated business with a year end of 28 February 2009 which spends £50,000 on 27 February 2009 will be able to
claim total allowances in year one of up to £45,958, which is nearly 92% of the £50,000 outlay. The balance of outlay [just £4,042] will be written off in subsequent tax years.
It can be seen from this that the allowance is discriminatory against businesses which do not date their accounting years to March/5 April. HMRC would argue that as March/5 April is the fiscal date then some bias is inevitable.
PostScript
On a practical level if you plan to commit to substantial expenditure under a hire purchase contract it should be borne in mind that the effective date for tax purposes is when the asset is brought into use in the business not when you commit to the expenditure. By example a light engineering business wishing to commit now to a contract for a machine may have a year end of 30 April 2008.
Provided the asset is not taken in to use [i.e. delivered by the supplier] before 1May 2008, it will be able to claim the full 100% tax deduction on the first £50,000 when it prepares its accounts for the year to 30 April 2009.
“Plant and Machinery” covers a multitude of items. If you have any queries or require further information please contact your nearest office.
