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Capital Allowances - significant tax saving opportunity

On Wednesday, the Chancellor announced a major change to capital allowances, which offers businesses a significant tax saving opportunity.

Although the fine detail has yet to be released, it seems clear that the annual investment allowance [“AIA”] – an allowance that gives immediate tax relief for expenditure on items that would normally be written off over many years – will be increased from £25,000 to £250,000 for qualifying capital expenditure incurred on or after 1 January 2013.

As you might expect, there are various criteria that must be met by both the business (including that it must be trading) and the assets bought (it does not, for example, cover cars bought by a business) but the huge increase in the AIA can offer dramatic tax savings at the time the assets are bought, as evidenced by this simple example:

A Limited is a profitable trading company that is about to buy items of plant costing £100,000.  It has already spent more than £25,000 on items eligible for AIA, in its accounts period to 31 December 2012.

(1)   if it buys the items before 1 January 2013, A Limited can claim allowances in 2012 and 2013 of £18,000 and £14,760 respectively.  The remainder of the cost (£67,240) will be written off over a number of years; it will take twelve years to get 90% of the cost written off; but

(2)   if A Limited waits until 2 January 2013, it will be able to claim for the full £100,000 when calculating its taxable profits for the year.

If A Limited pays tax at 20%, its tax liability for 2012 and 2013 combined will be nearly £13,500 less, if it waits until early January.

The savings for a partnership could be even higher – using the same figures as for A Limited, the partners’ tax liability could be as much as £33,600 lower, for the two years.

We appreciate that there is very little time in which to make a decision and that it may now be too late to defer expenditure – unfortunately, the timing of the Chancellor’s Autumn Statement means that you may need to make decisions very quickly.  We do know, however, that it is sometimes possible to delay the effective purchase date and it may be worthwhile contacting the supplier if you think this might be relevant.  In our opinion, the cash flow benefits make this worth looking into.

As ever with tax, the devil will be in the detail  - the impact of the new rules will probably differ for different accounting dates - and this email is meant only to give you an outline of the planned changes and the opportunity to defer your tax liability that they may offer.  We hope you find it useful, even if the revision might not directly affect you, this time.

If there is anything you would like to discuss, do please get in touch with your usual contact at Mercer & Hole or click through to Our Partner page.

 

 

Date: 10th December, 2012
Author: David Mansell

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