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Using Capital Expenditure To Reduce Your Tax Bill

Capital assets purchased by a business can be used in certain circumstances to reduce your tax liability.

A Capital asset is an asset used by the business over a long period of time (normally more than 2 years) and these assets are designed to enhance the business’s long-term productivity.

Examples of the most common types of capital assets

  • Plant & Machinery (P&M) (classed as Main P&M)

  • Computers (classed as Main P&M)

  • Fixtures and Fittings (classed as Main P&M)

  • Website development (classed as Main P&M)

When purchasing capital assets the business will receive tax relief in the form of capital allowances, the capital allowance rates vary but they are used to reduce your taxable profit. In most cases, plant & machinery capital allowances will obtain 100% relief which can have a significant impact against tax liabilities.

Benefits of claiming capital allowances:

  • You may receive a cash benefit and therefore improve cashflow

  • It may reduce or completely shelter a tax liability

  • There are no restrictions on high-rate earners when claiming capital allowances

New Super Deduction Allowance

HMRC has introduced a Super Deduction rate of 130% for main rate assets and 50% for special rate assets. The new rate applies to qualifying assets incurred between 1 April 2021 and 31 March 2023 and the main condition is that the asset is purchased NEW and not second-hand.

This means if you were to purchase an asset for £10,000 you will obtain £13,000 in allowances to offset against your business profits or potentially incur further losses.

The Super Deduction rates are available alongside the existing capital allowance rates as noted in the table below.

When it comes to purchasing assets, the timing of the purchase can have a big impact on when you can obtain relief in a relevant tax year and therefore impact cash flow.

There are many scenarios and options available but here is a common example:

ABC Limited has a year-end of 31st March 2020 and purchased NEW machinery with a cost of £100,000.

If the company purchased the asset on 01.03.20 they would be able to obtain corporation tax relief within the tax return to 31.03.20. This would allow the company to gain relief within 2020 which is good for cash flow but the capital allowance would be at 100%.

If the company purchased the asset on 01.04.20 the relief would be given within the tax return prepared to 31.03.21. Which in comparison means that purchasing an asset 1 month later would result in the tax relief not being obtained until much later but relief would be given at 130%.

Each scenario has its own merits, and it will be down to the business’s cash flow, future trading conditions, and tax position.

Capital allowance main rates:

The area of capital allowances on capital expenditure can be a complex area, especially as there is no defined list of items that qualify as a capital purchase. It is important to gain advice from an accountant before making a purchase to ensure you are aware of the tax implications and options available.

Need further advice?

If you need advice and would like the opportunity to discuss your tax liabilities, get in touch we would be happy to help. 01788 815017

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