Posted by James Pearson on 25 Jan 2013

Relief for Capital Expenditure

Recent changes to the relief available under the Annual Investment Allowance offer opportunities to benefit from greatly accelerated tax relief for substantial capital expenditure.

Capital Expenditure

In simple terms, there are two types of expenditure that a business or company can incur: revenue expenditure which is of short term benefit to the trade and capital expenditure which should benefit the company for a number of years. Tax relief for revenue expenditure is relatively straightforward; since the benefit to the trade should be short-term, relief for that expenditure is allowed in the accounting period in which the cost is incurred. For capital expenditure relief is normally given through the capital allowances system, spreading relief across multiple years.

Annual Investment Allowance

In April 2008, as part of an attempt to stimulate capital investment, the government introduced the annual investment allowance (AIA). This allowed relief for capital expenditure up to a certain level to be available in full in the accounting period in which the expenditure was incurred. The relief was originally set at £50,000 of expenditure per annum but has since fluctuated wildly, going up to £100,000 before dropping back down to £25,000. The Chancellor’s recent Autumn Statement increased the level up to £250,000 per annum from 1 January 2013. The allowance is due to fall back to £25,000 in January 2015.

This will obviously be a consideration when considering the timing of capital expenditure, since full relief will be available up to a maximum of £250,000 per annum for the next two years. This could also have the effect of both deferring and reducing tax payable if the capital that is purchased is later sold. In the year of sale, any investment allowance given for expenditure that is later recovered in the form of sale proceeds will be taxable, but as corporation tax rates are falling this will mean that for companies less tax should be due than if that amount was subjected to tax in the current accounting period.

Care should be taken however as the rapid and substantial changes in the allowance available and the interaction of the transactional rules that are designed to smooth over these changes mean that the calculation of the total relief that could be available is very complex. There are also restrictions on the type of capital expenditure that would qualify (for example no relief is available for the purchase of cars under these rules).

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See also…

Capital Allowances – Are You Claiming All You Can?

New Pooling Requirements Limit Capital Allowances Claims

Capital Allowances: Annual Investment Allowance

Finance Act 2018 Enacted

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