Rebecca McIlroy, Assistant Manager, Tax
When it comes to tax relief on capital expenditure, the devil is in the detail – not all types of expenditure are going to be eligible for tax relief in the same way. If your company is planning to make a capital investment, you may be considering whether to invest in brand new or second-hand machinery, as well as asking the crucial question: how can I maximise tax relief?
Earlier this year, the government introduced a temporary increase in tax relief known as a super deduction. If your company invests in certain types of new plant and machinery between 1 April 2021 and 31 March 2023, you can deduct 130% of the qualifying expenditure against your taxable profits, effectively saving 25p in corporation tax for every £1 of investment in the year of expenditure. However, only plant and machinery purchased brand new by companies will be eligible for the relief. Furthermore, there could be a claw-back of the relief when the asset is disposed of.
Given that the deadline for acquisition is not until 31 March 2023, time is on your side when it comes to planning and arranging financing.
Timing becomes more critical if your business is considering an investment in second-hand machinery. This machinery will not qualify for the super deduction, but it is not all bad news. Second-hand qualifying machinery should qualify for Annual Investment Allowance (AIA) relief which offers a 100% first year deduction against profits, up to the AIA limit.
The limit for AIA is currently £1m per year and is scheduled to reduce to £200k after 31 December 2021. Given the large disparity in the maximum allowance, a delay in purchasing qualifying second-hand plant and machinery after 31 December 2021 may be disadvantageous to your company.
Let me illustrate how important timing is. If your company has a 31 December 2021 year-end, you can claim £1million of tax relief on qualifying expenditure, potentially saving £190k corporation tax for the year. However, if you were to delay making this capital investment of £1m until the 31 December 2022 year-end, only £200k of qualifying expenditure could receive AIA, reducing the upfront tax relief to around £65k, with the remainder received over time.
In this example, the difference between incurring expenditure in 2021 as opposed to 2022 is tax relief of £125k received upfront. Therefore, the timing of your capital expenditure is crucial. If your business’ chargeable period spans the 31 December 2021, tricky transitional rules will apply, which are particularly strict when the AIA limit decreases.
If your company is committed to making substantial capital investments in the near future, you should consult with your tax advisor as soon as possible. To maximise tax relief, brand new plant and machinery must be acquired before 31 March 2023 and second-hand investments should be made before 31 December 2021.
For further information or advice, Rebecca McIlroy can be contacted at email@example.com
Grant Thornton (NI) LLP specialises in audit, tax and advisory services.