Capital Allowances for Manufacturers
Capital allowances provide tax relief across a wide range of capital expenditure. Despite the relief being very valuable, many businesses are missing out by failing to identify and maximise claims to which they are entitled. Relief for the capital expenditure is given as a deduction against the business’ profits. The rate of the tax relief depends on the nature of the asset purchased, the type of business activity being carried on, and when the expenditure is incurred.
The rate of tax relief can be as much as 100%, effectively providing a full write-off of the cost against taxable profits in the year of purchase. Where 100% relief is not available, writing-down allowances are provided instead. These too give relief on the full cost of the capital expenditure, but relief is spread over a number of years. Currently, writing down allowances can be given at rates of 18% and 8%.
Capital allowances are flexible in approach and it is not necessary to have to claim the relief. Provided care is taken to follow the rules, it is possible to pick and choose what to claim, and in some situations, when to claim. This can be very useful from a tax planning perspective.
Capital allowances are evolving all the time, with relief being provided across a wide range of assets. For most businesses, allowances are typically available on plant and machinery and also fixtures within buildings.
To claim these allowances, you must be carrying out a qualifying activity and incurring qualifying expenditure. ‘Qualifying activity’ encompasses all taxable activities other than passive investment. That means capital allowances can be claimed by the self-employed, partnerships, companies, and furnished holiday let landlords. ‘Qualifying expenditure’ is spending on the majority of plant and machinery used for the purposes of the trade, and fixtures contained within the business premises. Certain assets such as goodwill are specifically excluded.
Examples of assets that can qualify for capital allowances are computers, office furniture, machinery, tools, kitchens, heating, lighting, carpets, ventilation systems, vans, motor vehicles, and many more. Capital expenditure incurred on qualifying costs is added to one of three pools, with allowances given at the pool level rather than separately for each individual asset. The three pools, together with the rate of relief they attract, are:
- General Pool: 18% writing down allowance
- Special rate Pool: 8% writing down allowance (6% from April 2019)
- Single Asset Pool: 18% or 8% (6% from April 2019) depending on the asset
Most plant and machinery expenditure incurred on assets used exclusively for the business are included within the general pool. The main exception is cars with a C02 emissions figure exceeding 110g/km – these enter the special rate pool. Single asset pools are intended for assets used within unincorporated businesses, where there is both business and private use. Here the capital allowances are reduced proportionately to reflect the private use.
Finally, elections can be made to treat particular assets, or in some cases groups of similar assets purchased at the same time, as entering their own single asset pool. These are known as short-life asset elections and can be advantageous for assets that have a low useful economic life within minimal disposal value.
Annual Investment Allowance
The annual investment allowance (AIA) is the most versatile and generous capital allowance, providing 100% tax relief in the year of purchase. It is available on qualifying expenditure incurred on both new plant and machinery, and fixtures within buildings, but specifically excludes cars.
The AIA is currently set at £200,000 for a whole year, but will increase to £1m from 1 January 2019. Where a chargeable accounting period straddles the increase in the AIA, the total amount available will be time apportioned, but with relief restricted depending on the timing of the additions. This is important for tax planning purposes.
A company with an accounting period ended on 31 March 2019 will have a total AIA available for the year of £400,000:
Period 1 April 2018 to 31 December 2018: £200,000 x 9/12 = £150,000
Period 1 January 2019 to 31 March 2019: £1m x 3/12 = £250,000
However, the AIA available on capital expenditure incurred before 1 January 2019 will be restricted to £200,000 as this was the rate in force at that time. It may then be preferable to delay expenditure until on or after 1 January 2019. Once the AIA has been used, or if a decision is taken to make only a partial claim, any balance of the qualifying expenditure will attract writing down allowances at the appropriate general pool or special rate pool rate.
It is not mandatory to claim the AIA allowance, and it will not always be beneficial to do so. Claims can be tailored to help preserve personal allowances or where there aren’t enough profits to utilise the allowance. You can also choose not to claim the AIA where the asset is going to be disposed of in the near future and claiming the AIA would trigger a balancing charge in the future.
Like the AIA, first year allowances (FYAs) allow a 100% deduction against in-year profits. Currently, they are only available for certain types of assets, including low-emission new cars, new vehicle electric charge points, new zero-emission goods vehicles, certain new energy-saving and water-efficient equipment, and certain new gas refuelling equipment.
Cars do not attract the AIA, so the only way to secure a 100% capital allowance for a car is to buy a new low-emission car. Where expenditure is incurred on or after 1 April 2018, a low-emission car is one with CO2 emissions of less than 50g/km. The figure was 75g/km for expenditure incurred between 1 April 2015 and 31 March 2018. FYAs are only available for a new car. Second-hand cars don’t qualify, even if the CO2 emissions are below the threshold. From April 2020 the FYA available on energy-saving and water efficient equipment will be abolished. If investment on these types of assets is planned for the future, it could be advantageous to bring that capital investment forward to access the FYA and accelerate the relief.
How we can Help
Our approach is based on being able to provide a fully integrated service consisting of:
- Accounting advice to ensure the accounting treatment optimises the relief;
- Tax advice to identify and capture the optimal basis of tax relief;
- Surveying of assets to identify the maximum qualifying expenditure;
- Tax compliance services to ensure that claims are processed accurately and are progressed by HMRC as quickly as possible;
- Entitlement reviews;
- Transaction advice – understanding pooling and fixtures requirements.
If you have any questions or if you would like to discuss Capital Allowances with us in more detail, please contact Hannah Farmborough or call on 0207 429 4147 to be put in contact with a member of our Manufacturing team.
This article featured in issue 3 of our manufacturing and engineering newsletter series. Read the full newsletter here: The Engine – Issue 3