Reduce Your Tax Bill
Due to an increase in supplier demand, a logistical distribution company recently decided to upgrade their fleet of lorries and refrigerated vans to enable them to meet their customer’s needs.
From 1 January 2019 HMRC temporarily increased the Annual Investment Allowance (AIA) from £200,000 to £1,000,000, reducing back to £200,000 on 1 January 2021. The AIA allows for 100% tax relief in the year of purchase, for assets which qualify. If a company chooses not to use their AIA in the year in which it buys the asset, then the company will not be able to claim 100% next year, only the standard writing down allowance (WDA) rate. The standard WDA is 18% reducing rate for main pool or for assets qualifying for special rate pool WDA the reducing rate is 8% until 31 March 2019 and 6% from 1 April 2019.
In September 2018 the client, with an accounting period ended 31 December, contacted us for advice on the most tax efficient method of upgrading their refrigerated vans and lorries as well as purchasing additional vehicles. The client initially planned to purchase the vehicles in October 2018 however, we advised the company that if they were able to wait 3 months then they could take advantage of an increase in the AIA.
As a result, the company decided to purchase the vehicles, totaling £650,000, in January 2019. The full capital expenditure was eligible for AIA and as a result the company was able to reduce its chargeable profits before corporation tax by £650,000.
To further utilise the increased AIA, the company decided to refurbish their warehouse.
Whilst budgeting for the warehouse refurbishment, the company realised that their capital expenditure for the full year would be more than £1,000,000 AIA limit. The company was concerned that they would be unable to benefit from the tax allowance.
However, part of the upgrade included replacing the air conditioning.
Another allowance provided by the government is the First Year Allowance (FYA). If a company buys an asset which qualifies for FYA then they can deduct the full cost of the asset from the profit before tax. A company is able to claim FYA in additional to AIA, further increasing the company’s allowance limit.
Most FYA are for energy and water efficient equipment which includes qualifying air conditioning. When choosing the air conditioning model, the model which qualified for ECAs was £15,000 in comparison to a £10,000 for the standard unit.
Although this required the company to invest more money up front, they were able to fully offset the total £15,000 from their profit before tax in the year they acquired the asset. If the company opted to purchase the standard (non FYA qualifying) unit, then they would have received relief against their profit before tax at a reducing rate. This would have taken over 14 years until the company was able to get relief for the full cost of the asset.
Once the company were aware about FYA they were also able to claim the allowance for qualifying lighting and hand dryers, further increasing the company’s tax saving.
Expenditure pre 1 January 2019 with non-qualifying air con units
| Expenditure pre 1 Jan 2019 | £ | AIA | MP | SRP | Total capital allowance claim
|
| Vehicles | 650,000 | 200,000 | 81,000
(450,000 @18%) |
281,000 | |
| Warehouse fit out | 550,000 | 99,000
(550,000 @18%) |
99,000 | ||
| 10 Non-Qualifying FYA (air con etc) | 70,000 | 4,550
(70,000 @8/6%) |
4,500 | ||
| 1,285,000 | 200,000 | 180,000 | 4,550 | 384,500 |
Total Tax Saving at 19% of £73,055
Expenditure post 1 January 2019 with qualifying air con units
| Expenditure post 1 Jan 2019 | £ | AIA | MP | FYA | Total capital allowance claim
|
| Vehicles
|
650,000 | 650,000 | 650,000 | ||
| Warehouse fit out | 550,000 | 350,000 | 36,000
(200,000 @18%) |
410,000 | |
| 10 Qualifying FYA (air con etc)
|
105,000 | 105,000 | 105,000 | ||
| 1,305,000 | 1,000,000 | 36,000 | 105,000 | 1,165,000 |
Total tax saving at 19% of £221,350
If you have any queries regarding capital allowances, please get in touch with Andrew Neuman from the Tax Services team at MHA Carpenter Box on 01903 234094 or email andrew.neuman@carpenterbox.com
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