Capital allowances are a tax relief available on the plant and machinery you purchase in your business. They are deductible from your trading profits and reduce the amount of tax you pay.
At Crowthers Chartered Accountants we are experienced at assisting businesses to identify the expenditure that qualifies for tax relief and helping our clients to make the most of the allowances available to them. We are always keen to look at year end planning with our clients, but this year we are emphasising the importance of looking at this earlier than usual. We are shining a light on two important changes to capital allowances affecting many of our clients.
An important type of capital allowance is the Annual Investment Allowance (AIA). Most plant and machinery qualifies, and tax relief can be claimed on the whole cost of the assets up to the AIA limit. The current AIA limit is £1 million, which will revert to its previous level of £200,000 as of 1 January 2021. Unless your year end is 31 December, transitional rules will apply.
As a result, if you have a 31 March 2021 year end, the AIA limit is calculated as; the proportion of the period from 1 April 2020 to 31 December 2020 (that is 9/12 x £1 million = £750,000) plus the proportion of the period from 1 January 2021 to 31 March 2021 (that is 3/12 x £200,000 = £50,000). The businesses maximum AIA for this period is £800,000, however no more than £50,000 of the plant and machinery costs incurred between January and March will qualify. The additional expenditure over this amount will benefit capital allowances of just 18% of the cost of the asset. So, if you intend on purchasing large plant and machinery this year it is worth considering doing this before the end of December 2020 to maximise your tax relief.
Another capital allowance facing changes is the Structures and Buildings Allowance (SBA). From April 2020 SBA increased from 2% to 3%, meaning the allowance can last up to 33 and one third years. The structure must be used for a qualifying activity (mostly trades, professions and vocations) – for example farming. You can claim on construction costs including; fees for design, preparing the site for construction, construction works, renovation repairs and conversion costs, and fitting out works.
At Crowthers we have a dedicated team with a large portfolio of clients. With our useful tips and expert assistance, we can help you and your business to minimize the tax burden and increase profitability.