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7th November 2017

Capital Allowances – whether to claim or not?

Filed Under: Accounting, Tax

The most common forms of Capital Allowances available on plant and machinery are currently Annual Investment Allowance (AIA),   of up to £200,000 per annum and Writing Down Allowance (WDA), set at 18% per annum.  But there are times when a claim may not be tax efficient.

Wasted personal allowances

Sole trader – There is no compulsion to claim all of the allowances that one is entitled to, since one can disclaim all or part of the allowances due. It is not therefore usually sensible to claim relief where the remaining profit arising would in any event be covered by personal allowances. Best advice would normally be to claim such relief as would reduce profits to the personal allowance relief threshold. It is not usually good tax planning to lose the benefit of personal allowances.

Partnership – This may not be straightforward in a partnership with differing personal circumstances for each partner, with a claim of capital allowances made against partnership profits, which are then allocated according to the profit sharing ratio. Whilst not always easy, it is usually possible to come up with a compromise which benefits most of the partnership’s members, remembering that other reliefs (e.g. averaging) may be available to be claimed on an individual basis to mitigate any negative effects. Please note that a mixed partnership which includes a limited company, a trust or estate is not entitled to claim AIAs.

Companies – Since companies are not entitled to personal allowances the point is not relevant.

Preserving ‘in year’ losses

The effect of disclaiming Capital Allowances is to preserve the value of the plant and machinery pool. This will give rise to higher writing down allowances (more tax relief) in future years and may also reduce any balancing charges which may arise on the disposal of assets, minimising the likelihood of a tax charge when you sell assets.

Losses brought forward may only be used against profits of the same trade, while losses made in a current year can be claimed against other sources (e.g. rental income and capital gains) subject to a £50,000 restriction. Current year losses are therefore much more flexible.  The £50,000 restriction applies to sole traders and partnerships.

Business cessation

Preserving the value of the plant and machinery pool is also very useful as a business approaches the end of its life.  As mentioned above a high pool value brought forward will mitigate any balancing charges and may give rise to a balancing allowance, which could potentially feed into a terminal loss claim, where many options are available to maximise tax relief.

Please note that an Annual Investment Allowance claim is not available in the final accounting period.

Hire Purchase agreements

If plant and machinery is purchased under a hire purchase contract you can only make a claim for the outstanding payments when the item is put into use. This rule has particular relevance to machinery with seasonal use, for example a Combine Harvester purchased in February is hardly likely to have been used before the 31 March year end, and therefore only the payments made can be claimed in that tax year.

It is possible though that this rule may actually work to a trader’s advantage, in that the AIA relief may be legitimately split between the two tax years.

To summarise

Think before you claim.  Are you wasting allowances?

  • Could a partial disclaim lead to greater relief in the future, perhaps giving rise to an in-year loss claim available against rental income and/or a capital gain?
  • Is the business approaching the end of its life, where the flexibility of a terminal loss claim could be beneficial?
  • Would a split year AIA claim for the purchase of a seasonal machinery under HP be advantageous?

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