What can you claim if you’re investing in your business?

Accounts, Corporation Tax, Limited Company, Personal Tax, Planning, Sole Trader,

When you’re investing in your business, it’s not a decision that you take lightly, and it’s one that can make a major difference to your profits and your tax liability. It’s important that any resulting tax relief claim is considered carefully, and is likely to be influenced by the structure of your business, as well as the items you’re investing in.

What are Capital Allowances?

Capital Allowances are a type of tax relief for your business. They allow you to reduce your profits by some or all of the cost of your purchase, and therefore reduce the amount of tax you’ll pay.

There are different types of Capital Allowances, which you can choose between depending on your circumstances at the point you’re investing in your business. This is where you need to speak to your Accountant to ensure you’re making the right choice and getting the maximum benefit.

In the majority of cases, certainly for our clients, the most important options to consider are Full Expensing and the Annual Investment Allowance (AIA), which we’ll look at in more depth here.

Which you go for will depend largely on the structure of your business, but both allow for the full amount of your expenditure to be allowed against your tax in the year the cost is incurred.

What investment qualifies?

Most tangible capital assets, other than land, structures and buildings, used in the course of a business are considered ‘plant and machinery’ for the purposes of claiming capital allowances. 

Plant and machinery that may qualify for capital allowances are listed as follows on the gov.uk website:

  • machines such as computers, printers, lathes and planers
  • office equipment such as desks and chairs
  • vehicles such as vans, lorries and tractors (but not cars)
  • warehousing equipment such as forklift trucks, pallet trucks, shelving and stackers
  • tools such as ladders and drills
  • construction equipment such as excavators, compactors, and bulldozers
  • some fixtures such as kitchen and bathroom fittings and fire alarm systems in non-residential property.

‘Plant and machinery’ includes most things that as a Business Owner you’d usually consider as investing in your business, from new laptops and office furniture to substantial equipment such as printing presses or factory robots. 

The plant and machinery you purchase must usually be new and unused to qualify (see the exception for second hand items in the Limited Company section below).

Limited Company – Full Expensing

This new scheme, announced as part of the Spring Budget 2023, is a replacement for the Super Deduction which expires on the 31st March 2023. 

Full Expensing allows companies to claim 100% capital allowances on qualifying plant and machinery investments to an unlimited amount against their Corporation Tax, until the 31st March 2026. There is an intention from Government to make this permanent, though no date has been set for this to happen.

Full expensing does NOT apply where the plant and machinery is second hand, at which point you would claim AIA against your Corporation Tax, as outlined below.

Unincorporated Businesses – Annual Investment Allowance (AIA)

If you’re a Sole Trader or a Partnership, this is the option for you! 

Through AIA you can reclaim 100% of your investment in qualifying plant and machinery up to £1million a year, in the year the cost is incurred. This would be set against your profits to reduce your income tax liability.

AIA can be used by a Limited Company that is purchasing second hand plant and machinery items, at which point it would reduce your Corporation Tax liability.

As with many tax reliefs, Capital Allowances can be complicated! This post is an attempt to simplify the most common options that are relevant to our clients. 

There are other considerations around Capital Allowances, for example that can allow you to claim a percentage of your investment over a period of time, so speak to us (or your own Accountant) before you make any big decisions!

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