Capital expenditure (CAPEX) is depreciated in the accounts, but this depreciation is not allowable for tax purposes. Instead, businesses can claim specific tax allowances, but these differ considerably for ‘Plant and Machinery’ (P&M) and ‘structures and buildings’, the latter writing off the asset much more slowly. Indeed, most small business can relieve all their P&M expenditure in the year of acquisition.
The definition of P&M is not straightforward and different types can receive different rates of tax allowance.
For companies (but not unincorporated businesses and LLPs) the Chancellor has announced significant additional tax relief for P&M expenditure incurred from 1 April 2021 to 31 March 2023. Notably, this allows most expenditure on new P&M to qualify for 130% relief (i.e. £1,300 for every £1,000 spent) in the year of acquisition. With a 19% Corporation Tax rate, this gives effective tax relief of 24.7% on the amount actually spent, to encourage companies to invest in P&M prior to Corporation Tax rates going up for those with profits above £50,000 in April 2023.
This extra tax break has knockon consequences, in that there is significant extra record-keeping required and special rules when the P&M is subsequently sold.
Note that, with very limited exceptions (e.g. dual-control cars used by driving instructors and hackney carriages), cars are not eligible for these new allowances.
Vans, however, are eligible, so the next couple of years could be a good time to renew vans that your company owns.
Tax relief on CAPEX is a complex area, but the speed at which your business or company will get tax allowances may affect your investment decisions. Please speak to us to clarify the rules before undertaking any major expenditure on capital items.