Capital Expenditure - are you losing out?

As featured in The Southern Reporter - www.thesouthernreporter.co.uk

Capital expenditure – are you losing out?

A significant amount of capital expenditure may be incurred by a company when it starts up or expands however many companies do not take into account the tax relief that could be available in respect of this expenditure and the impact that this may have on their tax liabilities and cash flow.

Neither expenditure that is capital in nature nor depreciation on capital expenditure are allowable as a revenue deduction when calculating the taxable profits of a business. It may however be possible to obtain relief by claiming capital allowances instead. Capital allowances are deducted from the taxable profits of the business. They are not automatically applied and must be claimed via the company Tax Return.

Claiming capital allowances will reduce the taxable profits of the company and may result in a loss being incurred for which relief may then be obtained by carrying the loss forward against future trading profits, setting the loss off against other profits of the company in the period during which the loss was incurred and carrying the loss back against the profits of the preceding 12 months, as appropriate. Where the company is part of a group, the loss may, under some circumstances, be surrendered to a company within the same group.

Making the distinction between what constitutes revenue expenditure and what should be treated as capital expenditure can be challenging and should be determined based on the facts of each case and the application of factors such as statutory treatment, case law, the enduring benefit to the business and whether the expenditure represents the replacement or acquisition of an entire asset. Having identified that the expenditure is of a capital nature, further scrutiny will then be required in order to identify whether it qualifies for capital allowances and at what rate. Where expenditure is incurred prior to the commencement of trade, the expenditure is deemed to have been incurred on the date on which trading commenced.

The annual investment allowance allows a business to claim 100% tax relief on qualifying expenditure up to a maximum annual expenditure limit. The annual limit is currently set at £200,000 however it has varied over the years and, where the company’s accounting period straddles a change in limit, transitional rules are applied. The annual investment allowance must be claimed in the accounting period to which the expenditure relates.  Restrictions may apply.

Where relief is not claimed via the annual investment allowance, writing down allowances may be claimed on qualifying expenditure at the appropriate rate, currently 18% or 8% per annum depending on the type of expenditure. The most common types of expenditure are plant and machinery (such as equipment and vehicles) and integral features (electrical systems, cold water systems, heating and ventilation systems, lifts and moving walkways, external solar shading). Again, restrictions may apply. Expenditure on certain types of energy and water efficient equipment may qualify for 100% enhanced first year allowances subject to meeting specific criteria.

A tax charge may arise when an asset on which allowances have previously been claimed is subsequently disposed of and careful consideration should therefore be given to the timing of any disposal.

This article provides a brief outline of the tax relief that may be available via capital allowances. Detailed consideration should be given to the specific circumstances of a business when assessing capital allowances claims and any other allowances or tax reliefs that may be available.

Rennie Welch LLP accepts no liability on the basis of this article and detailed advice should be sought before entering into any transaction. If you require advice or assistance in connection with this or any other taxation matter, please contact Lynn Miller at Rennie Welch on 01573 224391 or by email at lynn.miller@renniewelch.co.uk