How HMRC helps UK businesses invest in equipment
Captial expenditure: the time is now
UK governments have always allowed businesses to reduce their tax bills by investing in capital equipment.
As long as businesses make a profit, they pay either income tax (unincorporated businesses), or corporation tax (limited companies). Tax liability is calculated as a percentage of pre-tax profits.
However, buying capital equipment can reduce your tax bill. Because it’s viewed as an operating expense, HMRC deducts the cost of qualifying equipment from taxable profits.
Why it’s easier to plan spending this year
The Annual Investment Allowance (AIA) of £200,000 hasn’t changed since January 2016, and it’s likely to remain at the same level in the Autumn Statement 2018.
This means you can buy qualifying business assets up to £200,000, and offset the whole cost against tax for this calendar year.
With the allowance unchanging, there’s no need for fiddly calculations to work out your entitlement for the fiscal year end.
Double your advantage using hire purchase
Hire purchase agreements are a clever way to make use of your allowance.
Your investment in equipment or technology counts towards your AIA, but you can spread the cost over a period that suits your budget.
AIA: rules to consider before you invest
To maximise tax relief on any capital investment, make sure you’re aware of the rules beforehand.
Here are a few important considerations for AIA:
• For equipment to qualify, it’s not enough to buy it. It must be in use by the end of the year in which you claim the allowance – and that includes assets bought on hire purchase. HMRC employ agents who know the difference between a cultivator and a combine, and can keep track of seasonal purchases.
• You must provide a purchase invoice to HMRC for any capital equipment, no matter how it is acquired. The date must fall within the period in which you’re claiming the allowance.
• If you’re an unincorporated partnership, you can’t claim AIA if one of the partners is a company or another partnership.
• A group of companies shares one AIA. The same applies where two or more businesses are controlled by the same person.
1. Credit agreements (Hire Purchase)
Debt finance is a common way of buying capital equipment. When the agreement expires, ownership is transferred to the hirer.
This type of credit agreement is called lease purchase or hire purchase, and counts towards your AIA (or writing-down allowance – see below) in the same way as buying outright. Any interest you pay as part of the agreement counts as a business expense, so reduces your tax liability even further.
2. Hire agreements (Rental or Operating Lease)
Hire agreements involve a business simply hiring equipment for a period of time, and include Contract Hire, Operating Leases, Leasing and Rental agreements.
Once the agreement ends, you return the equipment. Rental payments count as a business expense, so they reduce pre-tax profits and the amount of tax you pay. HMRC works this out annually, based on the length of the lease.
3. Cash purchase
When you buy equipment instead of renting, your business bears the cost of its depreciation. HMRC recognises this.
Once you reach the maximum claim amount for AIA, you can still claim ‘writing-down allowance’ for any further purchases. This is set at 18% of asset value annually, for assets you haven’t already claimed under AIA. So for the year in which you purchase an asset, you can deduct 18% of its price from taxable profits, reducing your tax bill.
In the second year, another 18% allowance will be applied, but this time to the reduced asset value: the original purchase price minus 18%. This is repeated each year for as long as you keep the asset. Of course, the percentage allowance can change within government budget statements.
Historically, the AIA threshold has been set inline with economic activity. In 2014, the allowance doubled to £500,0000 as a special measure by the government. This was to incentivise businesses in bringing forward their capital expenditure on plant and machinery, and in doing so, sustain the economic recovery in the UK.
Since 2016 the threshold has been set at £200,000. This entitles a business to acquire up to £200,000 of qualifying assets and charge the full cost of the investment as an operating expense in the year in which the equipment was purchased. When applied, this can have the effect of significantly reducing the amount of tax paid. Businesses are encouraged to invest in essential equipment and take advantage of this generous benefit.