Updated on: Jul 25, 2023
By far the most common asset purchase by our clients is IT related equipment, which makes sense because most of our clients are limited company contractors who supply their services to numerous clients based in both the UK and overseas.
Laptops are the most common asset purchase followed by desktop computers and then mobile phones. The most common IT brand our clients buy is Apple, followed by Dell. Other examples of asset purchases by our clients over the last 12 months include tools, smart speakers, portable monitors, office furniture, headphones, printers, microphones, docking stations and Apple pencils.
In this blog post, we will explore the world of capital allowances, the Annual Investment Allowance (AIA), and how you can unlock tax relief on equipment purchases, specifically focusing on “tax relief on equipment purchases” in 2023.
Want to watch our YouTube video instead? It summarises the main points but refer back to this article for more in-depth information.
- Understand the types of capital allowances and their eligibility criteria for tax relief on equipment purchases in 2023.
- Claim AIA to save taxes but be aware of restrictions & exclusions. Green technology investments can also provide tax benefits.
- Asset financing options have implications for claiming tax relief – understand anti-avoidance provisions before submitting claims.
Understanding Capital Allowances and Tax Relief
From an accounting perspective, assets are depreciated over the course of their useful life. However, in the UK depreciation is not a tax-deductible expense for your business. This is where capital allowances come in.
Capital allowances are a form of tax relief available to businesses when they invest in certain types of assets, like plant and machinery. When businesses claim capital allowances, they can reduce their taxable profit and save on corporation tax. These allowances were introduced to encourage businesses to invest in new plant and machinery and boost economic growth.
There are three primary types of capital allowances: plant and machinery allowances, special rate pool allowances, and the Annual Investment Allowance (AIA). Each type of capital allowance has its own eligibility criteria and claiming process, which we will discuss in the following sections.
Types of Capital Allowances
The Annual Investment Allowance (AIA) is a tax relief that allows businesses to deduct the full cost of certain qualifying assets, such as plant and machinery, fixtures, and fittings, from their taxable profits. The AIA offers 100% tax relief on the cost of qualifying assets, up to an annual limit of £1,000,000. This threshold has changed over the years, but it has now been permanently set to £1,000,000.
This threshold encourages significant investment by businesses in a tax efficient way, and you can see how getting immediate tax relief for up to £1,000,000 in purchases what help businesses make purchasing decisions. For our clients this threshold is immaterial because a number of our clients spend less than £2,000 pounds per year on IT equipment, and most clients spend significantly less than this.
Besides the AIA, there are other types of capital allowances, such as full expensing, the 100% first year allowance, and the writing down allowance. The 100% first year allowance applies to purchases such as (a) electric cars and cars with zero CO2 emissions, (b) plant and machinery for gas refuelling stations, for example storage tanks, pumps, and (c) gas, biogas and hydrogen refuelling equipment. Then there is the regular writing down allowance which applies at a rate of 18% on the expenditure in the capital allowances pool, while the special rate pool writing down allowance applies at a 6% rate. These allowances contribute to tax savings for businesses by reducing their taxable profits.
To be eligible for capital allowances, businesses must own the asset and use it for their trade. Additionally, the asset must fall into the eligible categories for capital allowances such as plant and machinery, integral features of buildings, R&D, and patents, and know-how. For our clients, IT purchases fall into the plant & machinery category.
When it comes to claiming capital allowances, businesses must submit a corporation tax return within the specified deadlines to get the tax relief.
For our clients this is wrapped up in the usual year end preparation of the annual accounts and company tax return. When calculating taxable profit for the business any depreciation from within the accounts is removed, and the details of any assets purchased within the year are supplied to calculate the capital allowances. In the final corporation tax calculation, the tax relief from any asset purchases are deducted from the tax due, and that is how the tax relief is claimed.
Businesses must ensure that all relevant information is included in their return and that it is accurate.
The Annual Investment Allowance (AIA)
The Annual Investment Allowance (AIA) is the most valuable tax relief for businesses that is used by our clients as it enables them to deduct the full cost of qualifying plant and machinery assets from their taxable profits. This provides an immediate tax saving for your company, as opposed to spreading the relief over several years through writing down allowances.
However, it’s important to note that there is a cap on the total amount of AIA that a business can claim. The annual maximum allowance is set at £1,000,000 per business. This cap means that large businesses with significant investment plans need to plan their asset purchases carefully to maximize their tax savings. For our typical clients they never get close to the AIA threshold so it is much less of an issue.
Most plant and machinery assets qualify for the AIA, but there are some notable exceptions. Buildings, land, and leased assets are not eligible for AIA. Additionally, certain assets like cars and pre-owned equipment are excluded from the AIA.
It’s important for businesses to familiarize themselves with the qualifying assets to ensure they claim the appropriate tax relief.
To claim AIA, businesses must calculate their total qualifying expenditure on eligible assets and include it in their relevant company tax return. Its a simple process to complete this within the company tax return. We use TaxCalc for preparing our clients tax returns and we simply add the details of the assets purchased within the year, and then select the asset value to be used in the AIA calculation (which is the purchase cost of the asset).
Restrictions and Exclusions
While the AIA provides a significant tax relief opportunity for businesses, there are certain restrictions and exclusions that prevent them from claiming a higher tax deduction. These include the cap on the total amount claimable, as well as the ineligibility of specific assets and business structures.
By being aware of these limitations and understanding that not all business investments qualify, businesses can plan their investments strategically to make the most of the available tax relief.
As mentioned above it is very rare for our clients to purchase assets that fall outside of the AIA rules. So, it’s unlikely that any restrictions or exclusions will apply to the assets purchased by limited company contractors for their consulting business.
Full Expensing is a 100% first year allowance which allows companies to claim the full purchase cost of assets in the year of purchase against their taxable income. The expenditure must be on Plant and Machinery, and it must occur between 01 April 2023 and 31 March 2026.
Note that this is only available to businesses that pay corporation tax, so unincorporated businesses cannot use this tax relief. For our clients it effectively works the same as AIA but expenditure must be on new and unused assets and there is no £1,00,000 limit like there is for AIA (though as I have mentioned before our clients never even get close to this threshold).
From April 2023 onwards we expect this to be the main capital allowance that our clients will claim when making asset purchases through their business.
Tax Relief for Environmentally Friendly Equipment
In recent years, there has been a growing emphasis on the importance of investing in environmentally friendly equipment and sustainable technologies. The UK government recognizes the need for businesses to adapt to a greener future and offers various tax relief schemes to incentivize eco-friendly investments.
By investing in green technology, businesses can not only contribute to a more sustainable future, but also take advantage of tax relief schemes that help them save money. In the following sections, we will explore the tax relief available for zero CO2 emissions cars and green technology investments.
Zero CO2 Emissions Cars
New cars with zero CO2 emissions are eligible for a 100% first-year allowance starting from 1 April 2021. The 100% first year allowance is also referred to as the Enhanced Capital Allowance (ECA). This tax relief encourages businesses to invest in electric vehicles and other zero-emission cars, reducing their carbon footprint and promoting a cleaner environment.
Cars with higher CO2 emissions are placed in the special rate pool, which is subject to a lower rate of capital allowances.
Special Rate pool expenditure
There is also a Special Rate (SR) allowance where you can claim tax relief on 50% of the assets value in the year the asset was purchased. This was introduced to cover a Special Rate pool asset purchases that don’t typically fall under the Plant & Machinery rules mentioned above.
Just like the Full Expensing allowance, this relief is only available to businesses who pay corporation tax and it only applies to brand new assets. Examples of Special Rate pool assets are (a) parts of a building considered integral – known as ‘integral features’ (b) items with a long life (c) solar panels (d) thermal insulation you’ve added to a building (e) cars with CO2 emissions over a certain threshold.
Asset Financing and Tax Relief
When it comes to financing equipment purchases, businesses often rely on asset financing solutions, such as leasing and hire purchase. These financing options can impact the availability of tax relief on equipment purchases, so understanding the tax implications of your chosen financing method is crucial.
In the following sections, we will discuss the differences between lease and hire purchase agreements and their tax implications. We will also cover the anti-avoidance provisions that apply to asset financing and the process of claiming tax relief.
Asset financing does not usually apply to our clients because their asset purchases only tend to be between £1,000 and £2,000 and they are usually paid for directly from the business bank account. However, we do have a handful of clients who purchased their assets with a hire purchase agreement.
Lease vs. Hire Purchase
The primary distinction between lease and hire purchase agreements lies in the ownership of the asset. With a lease agreement, you are merely renting the asset for a predetermined period, whereas, with a hire purchase agreement, you will own the asset upon completion of the contract. Lease agreements typically do not qualify for capital allowances, while hire purchase agreements may qualify if legal ownership is expected to pass to the lessee.
Typically the costs associated with a lease agreement are operational business costs that would normally be processed through the profit and loss account. For this reason, the cost of the expense is recognised in the year it is incurred. So although lease agreements do not qualify for capital allowances you still get the full tax relief anyway through the profit and loss account.
Anti-avoidance provisions have been established to ensure that businesses do not exploit tax relief schemes for unintended purposes. These provisions include restrictions on qualifying expenditures for finance leases and rules related to loans financing the purchase of exempt or relieved property.
By adhering to these anti-avoidance provisions, businesses can maintain compliance and avoid potential penalties.
Balancing charges and allowances
I just wanted to make a quick point about balancing charges here so that you can understand the full life cycle impact of buying and selling assets. If for example your business purchased an asset of £10,000 that was eligible for AIA last year, your business would have got the full tax relief on £10,000.
If you decide to sell the asset three years later for £4,000 you would need to record a balancing charge in the company tax return. The purpose of this balancing charge is to ensure your business gets only tax relief on the net value of the asset so effectively when the asset is sold for £4,000 you get a reverse capital allowance (eg an increase in your tax bill) on the sale price of £4,000. Once completed, then overall your business will have received tax relief on an asset purchase of £6,000, which reflects the net cost of the asset to your business.
In conclusion, unlocking tax relief on equipment purchases can significantly benefit your business by reducing taxable profits and boosting cash flow.
By taking advantage of capital allowances, the Annual Investment Allowance, and understanding the implications of asset financing, businesses can make informed decisions when investing in new equipment.
The use of capital allowances allows you to get full tax relief on the purchase cost of your assets in the year the assets were purchased. Usually, tax relief is spread over several years meaning the tax savings are also spread out, so capital allowances are useful and encourages businesses to spend.
Frequently Asked Questions
What is the Annual Investment Allowance (AIA)?
The Annual Investment Allowance (AIA) provides businesses with 100% tax relief on the cost of qualifying assets, such as plant and machinery, fixtures and fittings, up to an annual limit of £1,000,000.
This allowance is a great way for businesses to save money on their tax bill and invest in their business.
What assets qualify for the AIA?
Plant and machinery assets qualify for the AIA, excluding buildings, land, leased assets, cars, and pre-owned equipment.
What tax relief is available for environmentally friendly equipment?
The UK government provides tax relief for eco-friendly investments through Enhanced Capital Allowances (ECAs) where you 100% tax relief on the asset costs, and the Special Rate (SR) allowance where 50% tax relief is available.