Did you know the generous tax breaks that exist for investing in plant and machinery for your business?
There are several reliefs that are available but I will focus on AIA (Annual Investment Allowance) and ‘Full Expensing’ for plant and machinery.
By Daniel Smith – Client Manager
Annual Investment Allowance:
AIA allows a business (limited company, partnership, sole trader etc.) to claim tax relief at 100% on qualifying plant and machinery (e.g. capital equipment) up to £1 million of expenditure in each year.
If you spent £10,000 on qualifying capital equipment you could deduct this from your businesses profit for the year. For example, for a limited company this could save up to £2,600 in tax and an individual up to 47% in tax and NIC depending on the profit level for the year.
‘Full Expensing’:
This is an additional and alternative relief available only to limited companies. Much like AIA it offers 100% upfront tax relief on qualifying plant and machinery that has been purchased in a new condition on or after 1st April 2023. There is also an associated 50% first year allowance for expenditure on new special rate (including long life) assets.
Unlike AIA ‘Full Expensing’ is unlimited and there is a 50% first year allowance also available for items that do not qualify for 100% but only applies to new capital equipment.
Example:
A company has spent £10 million on various items of plant and machinery as part of creating a new state of the art production line. In addition the company also spends £2 million installing a brand new electrical system.
The company can claim the £10 million under ‘Full Expensing’ reducing its taxable profit by the full amount. The new electrical system would normally fall under special rate capital allowances but can qualify for the 50% first year relief therefore the company can claim to reduce its taxable profit by £1 million and have £1 million added to the special rate pool which will result in 6% writing down allowances (WDAs) in future years.
Summary:
‘Full Expensing’ has been described as the “biggest business tax cut in modern British history” but it must be noted that it will usually only benefit companies or groups of companies that have already utilised their £1 million AIA. However, the 50% first year allowance will be beneficial to companies purchasing new “special rate” expenditure that would normally only receive 6%.
Please talk to us for more information on these allowances when purchasing plant and machinery for your business.
