How well do you track the expenses you incur in your business?
Are you aware that expenses being categorised as either sales, or capital expenditure, means the later has potential tax saving benefits?
This is why it pays to stay on top of the numbers! A review of your expenses may reveal if you have made investments in items that are considered to have a lasting benefit to your business (usually more than a year). Where that is the case, these purchases may qualify as capital allowances meaning you can may be able to make a tax claim through the Annual Investment Allowance.
If successful, you'll then obtain potential tax relief through a reduction in your taxable profits over a set timeframe. This is why we've written this blog post to explain how the tax break works and what you need to know to both qualify, and reap the rewards of a cut to your tax bill.
In this blog you'll find answers to:
A capital allowance is a tax exemption that is available through the purchase of particular one-off assets. To qualify these assets have to be used in your business over the long term. The allowance covers various different types of one-off assets and works whereby some, or all, of the cost can be deducted from your profits before your tax liability is calculated.
Assets that usually qualify for capital allowances tend to be, but aren't restricted to, plant and machinery. It's important to note that the demolition of existing plant and machinery, or the altercation of a premises to install new plant and machinery is also permitted.
There are 3 ways to claim for a capital allowance:
1. The Annual Investment Allowance
2. The First Year Allowance
3. The Writing Down Allowance
For this blog post we're covering just the first one. However, it's generally recommended that you use the claim method that will ensure you obtain legitimately, the maximum amount of tax relief as quickly as possible.
The Annual Investment Allowance (AIA) is a form of tax relief available to UK businesses that undertake specific capital expenditure. Eligible organisations can use the AIA to deduct the total value (100%) of their qualifying assets, up to an investment limit of £1m, from their taxable profits in the tax year in which they are purchased. Currently, the £1m limit resets each financial year.
This means making use of the AIA potentially allows your business to invest in new equipment and machinery, and then reduce your tax liability with immediate effect. It provides a swift form of tax relief as opposed other tax breaks which can be clawed back over several years.
The government's thinking behind this incentive is to encourage SME businesses to invest in equipment, and assets, to help them develop and grow. The theory is if enough businesses make use of the relief and then achieve expansion, that helps stimulate economic growth and in turn can create employment opportunities.
To qualify for AIA you must fulfil specific criteria, namely the assets must be used for business purposes only, and they must be tangible. Tangible assets have physical substance and are classified as either inventory or fixed assets.
The below table provides you with an indication of qualifying (tangible) assets, and those that aren't permitted (intangible ones):
| Qualifying assets, (tangible) examples | Non-qualifying assets, (intangible) examples |
| Robotic machines | Brand, logo, or designs |
| Computer aided machinery | Patents |
| Printing presses, lathes, and tooling equipment | Trademarks |
| Agricultural machinery such as tractors | Copyrights |
| Computers, office furniture, and office equipment | Goodwill |
| Heavy duty vehicles such as vans, lorries, trucks, cranes, and diggers | Trade secrets |
| Integral features to buildings such as electrical systems, cold water systems, water heating, ventilation, air conditioning, lifts, escalators, and external solar shading | Franchise agreements |
| Building fixtures, shop fittings, kitchen and bathroom fittings | Digital assets |
| Games machines and amusement park rides | Databases |
| Fibre optic cabling |
|
| Wind machines |
You can not claim AIA on second hand assets, the purchases must be for new items, only. Furthermore, you can only claim AIA in the period in which you bought the item.
You also can't claim for cars, or any plant and machinery that has been used previously for other purposes.
Items you lease, land, buildings, doors, gates, water and gas systems, and things used for business entertainment purposes also don't qualify.
Expenditure made in the accounting period in which a business ceases trading is also void.
To determine the amount of AIA you can make use of, you need to consider several factors. The AIA limit is set at £1m, but it has historically been subject to change, so it's important to keep an eye on announcements by Chancellors in future Budgets and Autumn Statements.
To start with it would be wise to identify the qualifying assets that you plan to purchase. List the equipment, and machinery, that you intend to invest in.
Then you need to calculate the total value of these assets. This provides an indication of the potential tax relief you'll be able to claim. Of note, and this is important, AIA applies to the full cost of your assets, and that includes spending on things like installation and/or delivery.
Finally, once you've tallied up your expenditure, compare the total value of your qualifying assets to the AIA limit. If your value is likely to exceed it, you may need to consider phasing your purchases over different years to maximise the potential tax relief available to you.
It is also worth noting that full expensing is now permanent and may therefore be applicable if your qualifying expenditure exceeds the AIA limit.
As mentioned earlier, if you can maximise your AIA then you can reduce your corporation tax liability by deducting the full value of qualifying assets from your taxable profits. Achieving such tax savings can help improve your available cash flow.
Also, purchasing new equipment and machinery can potentially boost business productivity. Updating technology may have the impact of more efficient and effective methods of working, and new machinery has the potential to expand your production capacity. Such investments therefore can increase production and turnover, or lead to cost savings over time.
The ability to produce more may in turn allow you to expand into new markets while new equipment and technology can also bolster production quality. That can in turn can help retain customers whilst also attracting new ones.
There are several strategies that SME businesses can use to maximize their annual investment allowance.
Consider potentially timing your purchases strategically so that you don't breach the limit in a given year. This therefore may involve putting a purchase off to the next year if you're close to the allowance amount. Also, keep an eye on the AIA limit a lot over the years.
Whilst the limit as been described as being permanent at £1m, modern politics is known for being quite fluid. So, if an amend is announced in the near future and say the limit is reduced, then it may be beneficial to make your investments prior to the new limit coming into effect. That would mean you taking advantage of the higher limit and maximising the tax relief available to you.
Secondly, plan your purchases in advance by identifying the assets you need and their estimated costs. This allows you to budget effectively and avoid any last-minute rush to make purchases before the end of the tax year.
Additionally, consider financing options for your investments. This may help you spread the costs over a longer period and preserve your cash flow.
Finally, consult with a tax advisor, or accountant, who specialises in claiming capital allowances. They can provide you with knowledgeable guidance and advice to help you navigate the regulatory complexities of the scheme. They can also ensure that you meet all the eligibility criteria and maximise the tax relief you claim.
Whilst maximising AIA can bring significant benefits, it's important to avoid common mistakes that can lead to potential issues, or missed opportunities. This is why it's wise to seek professional advice. A tax advisor will ensure you understand the AIA and any implications for your business. They should also then help prevent the following:
One common mistake is failing to maintain accurate record keeping in regards to your purchases. It's crucial to maintain detailed documentation of your qualifying assets, including invoices, receipts, and delivery notes. This will help you support your claims and ensure compliance with tax regulations.
A regular mistake is not claiming the full amount that your business is entitled to. As mentioned earlier when conducting a business budget, and then investing, you should keep a ledger of all the qualifying assets that you purchase. Not doing this risks missing out on tax savings resulting in a tax liability that is higher than it should be.
Don't claim AIA twice on the same qualifying asset! This often happens when said asset is purchased, and then sold, and replaced in the same year.
Don't fall into the trap of claiming for assets that don't qualify. Refer to our table carefully, only certain types of plant and machinery are eligible. Be sure to seek advice if you're unsure, or have questions.
The content of this post was created on 22/02/2024.
Please be aware that information provided by this blog is subject to regular legal and regulatory change. We recommend that you do not take any information held within our website or guides (eBooks) as a definitive guide to the law on the relevant matter being discussed. We suggest your course of action should be to seek legal or professional advice where necessary rather than relying on the content supplied by the author(s) of this blog.
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