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Gain from pain
Page 40
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Finding the money for fleet replacement may be a headache, but there are some handy tax
allowances. Paula Tallon does the sums.
Committing hard-earned capital to buying new trucks can be a painful business, but operators should take cheer from the fact that such expenditure can attract tax relief in the form of capital allowances.
To be eligible for these allowances capital expenditure must be incurred on plant or machinery for a qualifying activity. But not all capital expenditure is treated equally.
So how do the tax rules define "plant and machinery"? If something is bought because it is needed in the business, it is likely to be plant —a truck or a forklift would qualify. If it's needed to allow a building to be used for any purpose at all, it is not plant. This would include heating equipment or windows, for instance.
What allowances are available?
Writing Down Allowances (WDAs) These are probably the most familiar allowances; they are a 25% write-down, which is given on a reducing-balance basis.
First Year Allowances (FYAs) These are available for expenditure incurred by small or medium enterprises at a rate of 40%. Not all expenditure on plant qualifies for a FYA. Expenditure is excluded if it is incurred: • In a period when a trade is discontinued • On a car • For an asset which is leased or hired to another party Energy Saving/Environmentally Beneficial Plant or Machinery Expenditure incurred on the provision of energy saving and environmentally beneficial plant and machinery qualifies for allowances at 100%. A full list of the plant and machinery that qualifies is set out on www.eca.gov.uk. Suppliers apply to have their products approved and entered on the lists.These lists are updated every quarter.
Planning
It is not compulsory to claim capital allowances so various planning opportunities arise, in particular with FYAs. A taxpayer could: • Claim FYAs in full, No WDA can be claimed in the same year.
• Claim FYAs in part (a set amount, or on some assets, but not others). Claim (or disclaim) WDAs on the expenditure not subject to an FYA claim.
• Disclaim FYAs. Claim (or disclaim) WDAs on expenditure not subject to FYA claim.
There are a number of reasons why it may not be beneficial to daim FYAs.These include: • Avoiding wasting personal allowances • Making use of brought-forward losses • Reducing a loss which cannot be relieved tax efficiently • Preventing a balancing charge on a disposal which gives rise to a higher rate tax liability • Increasing earnings for pension purposes
Pooling
Expenditure on plant and machinery must be allocated to one of three pools: a single-asset pool, class pool or the main pool.Assets must be allocated to a single asset pool if they include short life assets.
This includes vehicles costing more than £12,000 and assets with some private use.These pools are used to calculate the WDAs, balancing allowance and balancing charges. Where FYAs have been claimed on an asset that asset is allocated to a pool in the next accounting period.
Short life assets
Where assets are disposed of within four years any balancing allowances are delayed if the asset is in the main pool. To avoid this it is possible to make a short-life asset election, which has the effect of putting the asset in its own pool. This will accelerate the allowances on assets that require frequent replacement. If the asset is disposed of or scrapped within four years a balancing allowance (or charge) will arise.
Example A truck acquired for £60,000 in year one is subject to a short-life asset election. 'Short life' recognises that, unlike a building, the vehicle will serve the business for a relatively short period of only a few years at most.This truck is sold in year three for, say, £20,000. The allowances work as follows: Year 1 — FYA 40% — 124,000. Tax Written Down Value (TWDV) £36,000 Year 2 —WDA 25%£9,000.TWDV £27,000 Year 3—BalancingAllowance (£27,000-20,000) £7,000 If no short-life election is made the proceeds are simply allocated against the general pool and no balancing allowance would be available on disposal.
By making the election a tax deduction for £7,000 is available.
Elections must be made within a year after 31 January following the tax year in which the expenditure is made. If the asset is still held after four years it is allocated to the main pool at its written-down value.
Capital allowances offer a valuable tax saving opportunity and should be factored into every investment decision. A review of acquisitions should be undertaken to see if a short-life asset election is appropriate. Lastly, capital allowances should be factored into the acquisition of all assets by the business. • • Paula Tallon is Head of Direct Tax at Chiltern plc.