Make the most of the existing allowance before it reduces significantly
The capital allowances available on plant and machinery in the year of expenditure, are to be reduced significantly from the beginning of April 2012. However, there may still be time for businesses to maximise the available allowances and reduce tax liabilities.
How is the Annual Investment Allowance available?
Currently, businesses can spend up to £100,000 on an annual basis on qualifying plant and machinery and obtain a full tax deduction in the year of expenditure. With effect from 6 April 2012 (1 April 2012 for companies), the Annual Investment Allowance limit is being reduced to £25,000. Expenditure on qualifying plant and machinery that is not eligible for the Annual Investment Allowance will still qualify for a tax deduction, but the deduction is spread over future years, potentially increasing short-term tax liabilities.
Possible tax planning
Businesses should review their capital spending plans immediately and consider whether planned future purchases of plant and machinery need to be made before April 2012 in order to fully utilise the £100,000 Annual Investment Allowance limit, and accelerate the available tax relief. A business with a year end other than 31 March or 5 April will need to calculate what expenditure can be made before April 2012 to maximise the available allowance.
Maximising the relief from the the Annual Investment Allowance before April 2012 could reduce the top rate of tax for an unincorporated business from 50% to 40%, or 40% to 20%. For a company,the top rate of tax could be reduced from 27.5% to 20%. Therefore, tax liabilities may not only be deferred but actually reduced.
Ensure tax relief is obtained at the earliest opportunity
To ensure that tax relief is obtained at the earliest opportunity on capital expenditure, if an asset is being purchased outright, with no finance, the acquisition date for tax purposes is the date that the invoice is issued. However, extended payment terms cannot be available. If there is a gap of more than four months between the invoice date and the date on which payment is required to be made, the expenditure is not incurred until the date on which payment is required to be made.
If an asset is to be acquired with hire purchase, the acquisition date for tax purposes is the date that the asset is brought into use. Therefore, for agricultural machinery, the machinery must have been delivered before the relevant date for a tax deduction to be obtained, and the hire purchase must be on "normal" payment terms. If the machinery is a tractor which needs to travel on public roads to move around the farm, to be brought into use a tractor would have to be issued with road tax.