Concerned with your company’s profitability and effectiveness as you grow? Our handy guide to asset purchases and capital allowances will help…
If you’re the owner of a rapidly growing business, you need to know when to time an asset purchase. And understanding the allowances available is vital for your asset purchase planning, especially with the end of the current tax year looming.
What asset purchases can you deduct from your profits before you pay tax?
All kinds of industry sectors have heavy asset purchasing requirements for growth – which could be a vehicle, or kitting out a new office building, or investing in some new much-needed equipment. At Oscar Fairchild we’re used to helping growing businesses, providing a variety of them across London, Essex and Hertfordshire with the bookkeeping and accountancy support they need.
These clients are typically VAT registered, established and rapidly growing businesses, turning over in excess of £1 million per annum. If like these firms, you have asset purchase requirements, what do you need to be thinking about as the April 5 tax year end approaches?
A phrase you may have come across is ‘plant and machinery’ – and that pretty much covers, in HMRC terms, what you can claim capital allowances for when you buy assets to use in your business. And these assets fall in three main areas:
- business vehicles
What does plant and machinery include?
Businesses can deduct some or all of the value of legitimate assets purchased from their profits before they pay tax. In most cases that means deducting the full cost of plant and machinery items from profits before tax using Annual Investment Allowance (AIA).
The current AIA amount is £200,000, having been reduced from £500,000 in January 2016. This is for 12-month periods, and companies get a new allowance for each accounting period.
You can claim AIA on lorries, vans and trucks used to transport goods. But business vehicles eligible for AIA doesn’t include cars, so you’ll need to claim capital allowances for cars by using writing down allowances to work out the correct amount. The rate will depend on the car’s CO2 emissions, and when you bought it.
That may leave you looking for expert accountancy help to work out the correct amounts. Trying to understand why you can’t claim capital allowances on assets you might think would come under the plant and machinery definition may also leave you scratching your head.
Kim Redwood-Lee advises owners of rapidly growing businesses: “Don’t fail to invest in your company through a lack of understanding of asset purchase allowances. Get expert help and make sure you deduct the cost of plant and machinery from your profits before tax.”
You can’t claim capital allowances on anything you lease – you have to own the asset; nor on buildings, land and structures such as bridges or roads; or for items used only for business entertainment, like a company yacht!
Plant and machinery includes assets that you buy and keep to use in your business, as well as the costs of demolishing plant and machinery. And you can also claim for integral features of a building, and fixtures.
What asset purchases are considered integral features or fixtures?
If you run a next-generation B2B service firm like a web design or traditional graphic agency, an IT service company, an architect practice or HR service provider, then you may have a new office building you need to kit out as you experience a period of rapid growth.
So you’ll be keen to hear that various asset purchases considered ‘integral features’ can be written off against your taxable profits. These are:
- electrical systems, including lighting systems
- space and water heating systems
- air-conditioning and air cooling systems
- hot and cold water systems (but not toilet and kitchen facilities)
- lifts, escalators and moving walkways
- external solar shading
And if you rent or own the building you can claim for ‘fixtures’ such as fitted kitchens, bathroom suites, fire alarms and CCTV systems.
But remember, interest payments or finance costs for buying these or other assets should be deducted from your profits as a business cost if you’re a limited company.
What other asset purchase considerations are there?
If your business operates in the tech, manufacturing, or industrial sectors, then you should be aware of the Research and Development Allowance, which gives 100 per cent tax relief on qualifying expenditure, for example building a scientific laboratory.
And don’t forget that you can usually reclaim the VAT paid on goods and services purchased for use in your business. Oscar Fairchild can help by ensuring your financial records are correct and up to date. And by knowing all the special VAT rules, like for reclaiming VAT on assets such as computer equipment costing £50,000 or more before VAT.
That way you’ll never get caught out, or miss out on the right time to purchase assets for your rapidly growing business.
Get expert advice to help you get it right
Whatever problems you have when deciding on asset purchases for your business, you don’t need to do it on your own – working with Oscar Fairchild’s bookkeeping and accountancy service for growing businesses makes perfect sense for business owners.
About Oscar Fairchild:
Oscar Fairchild (incorporating Redwood Clarke since 01.09.18) is an Association of Accounting Technicians (AAT) qualified accountancy & bookkeeping practice with offices in The City of London and Billericay, Essex. Offering a wide range of services including Self-Assessment Services, Annual Returns, VAT Returns, Credit Control, Payroll, Auto Enrolment Pension and Management Account services to high growth businesses across London, Essex and Hertfordshire.