AN important factor when a business looks to invest in plant and machinery is the amount of tax relief it will obtain.
Since April, 2008, businesses of any size have been able to immediately write-off against profits the cost of capital expenditure on plant and machinery up to a total of £100,000 a year. This write-off does not extend to cars, unless the vehicle has a Co2 emission of less than 110g/km, as discussed in my last article.
For companies looking to make decisions on capital outlay from April, 2011, the rate of Corporation Tax has reduced where taxable profits exceed £300,000. The rate applied to companies whose profits are less than £300,000 is reduced from 21% to 20%.
Although the reduction in the rate of Corporation Tax is welcome, it also means that the tax relief due on plant and machinery investment will be less.
Furthermore, from April, 2012, the maximum amount of plant and machinery expenditure qualifying for the 100% write-off will significantly reduce from £100,000 to £25,000.
Expenditure in excess of the limits will qualify for writing down allowance of 20% reducing to 18% from April, 2012.
While April may seem a long way off before the reduction in capital allowance rates kick in, for those businesses whose accounting period straddle this date, the effects of the reduction may already have started, as the maximum rates of AIA have to be time apportioned.
Businesses with, say, an April 30, 2012 year-end will have a maximum AIA of £93,750 (11/12 x £100,000 + 1/12 x £25,000).
Businesses whose year end is December 31, 2011, will still be able to secure a maximum AIA of £100,000 if the expenditure is incurred before the end of the calendar year. But, if the capital expenditure is incurred a week later and falls into the 2012 year end, the maximum AIA entitlement will be reduced to £43,750 (3/12 x £100,000 + 9/12 x £25,000).
There are further restrictions if expenditure occurs after April 1, 2012.
For those businesses with an accounting period ending on or before March 31, 2012, it may be worth considering bringing forward planned expenditure on plant and machinery in order to secure an unrestricted £100,000 AIA before the reduced limit applies.
Not only will the tax relief be received earlier but it will also be at a higher rate.