Whilst the recent Spring budget announced no real new measures to support capital investment for owner managed manufacturing businesses, looking on the positive side, it didn’t scale back the existing allowances. The measures announced in the Autumn Statement, such as the permanent Full Expensing regime, remain in place. For any capital investment program to be successful, there is a requirement for stability in terms of being able to forecast timings of supply, production capacity or downtime to accommodate new infrastructure, along with the predicted financing mechanisms for investment. A settled capital allowances regime supports the ability to plan expenditure, and in the right order to gain the most tax efficient relief.
What do I need to consider?
There are various allowances available on the purchase of plant and machinery and, if an item qualifies for more than one type of capital allowance, you can choose which one to use. With choice can come indecision so it is important to map out the capital expenditure and allocate it appropriately.
Timing
The first point to consider is when the investment takes place. Where qualifying capital expenditure was incurred before 31 March 2023 it may be possible to claim the ”Super Deduction”. This could mean up to 130% relief against taxable profits. Depending upon the year end of the company this relief could be reduced but this is nevertheless generally the first port of call in claiming allowances.
Expenditure post 31 March 2023 can qualify for 100% Full Expensing relief for main rate expenditure, 50% First Year Allowances (FYA) for special rate expenditure such as integral features, or £1million Annual Investment Allowance (AIA). Claims under Full Expensing and 50% First Year Allowances are unlimited in terms of value. There are, however, increased restrictions on what can be claimed a when compared to the Annual Investment Allowance.
Maximising the relief
Where expenditure qualifies under both 100% Full Expensing and AIA, and there is unused AIA available in the year, relief under AIA should be used in preference to Full Expensing. This is because Full Expensing features a clawback of allowances on disposal.
Where total qualifying expenditure is in excess of the £1 million AIA limit (which is shared with other companies within the same group), careful consideration may be needed as to how expenditure is allocated. A starting point is to ensure AIA is claimed on second hand assets and also leased assets, as these are eligible for AIA but not Full Expensing or 50% FYA. Once the AIA is used up on these assets they will only attract normal writing down allowances of 18% or 6% dependent upon the type of asset purchased.
With remaining AIA available, the next step in the process would be to claim AIA on any special rate expenditure – this would otherwise this will only attract 50% FYA. Finally, claim any remaining AIA on new main rate assets, and claim 100% Full Expensing on any excess after the full £1 million AIA has been used up.
Forward planning
Armed with the above, and working backwards from the tax relief claim to the capex budget, a little careful planning between accounting periods can aid in maximising the tax benefits of investing in plant and machinery for the business.
