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Slow tax relief
Changes in the timing of tax relief for the cost of equipment were introduced a few years ago meaning that, subject to some exceptions, it will now take 20 years, at best, for your company to get tax relief for most of the costs of equipment used in its business.
Expenditure pools
Usually all expenditure on equipment has to be grouped together in a “pool”. As items are bought the cost is added to the pool, and when something is sold the proceeds received are deducted. After adding and deducting the cost of purchases and sales, a percentage (max 18%) of the balance is given tax relief. So, even if you’ve sold an asset, tax relief for it still trickles along on the reducing balance each year. There are, however, exceptions to pooling.
Annual investment allowance
The annual investment allowance (AIA) allows a business to claim tax relief on 100% of capital expenditure up to £500,000 in any one financial year; however, this reduces to £25,000 after 31 December 2015. Anything above the limit will only get tax relief under the pooling arrangement. But there is a way to get tax relief sooner.
Life’s too short - but not for tax
If you spend money on capital items that you expect to be used for less than eight years from the end of the current accounting period, you can make a short-life election (SLE). That will keep the asset out of the pool. Tax relief will still be given at the same rate as if it were in a pool, but when the equipment is sold or scrapped relief for all the remaining value will be allowed. That means instead of having to wait well over 20 years to get full tax relief, it will only take a maximum of between seven and eight years. Less than half the time!
Example. In January 2016 AB Ltd refurbishes its factory and offices. It spends £20,000 on water systems, new canteen equipment etc. It also buys £25,000 of computer hardware consisting of PCs and a host of minor items, e.g. memory sticks. It claims the £20,000 refurb costs under the AIA (these assets will be used for more than eight years). It also claims £5,000 of the IT expenditure under the AIA. It’s now used all £25,000. But it can make an SLE on the balance of IT equipment and speed up the tax relief.
Election time
AB could make an SLE on each and every one of the dozens of IT assets it purchased, but this would be an admin nightmare keeping track. The good news is HMRC offers a shortcut.
Tip. By concession HMRC allows you to make just one election for each type of asset rather than individually.
Trap. Some assets, e.g. cars and integral features (assets fixed to buildings), can’t be subject to a short-life election.
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