Capital Allowances
Capital allowances(CA’s) enable a reduced tax charge to be applicable to entities purchasing non-current assets. Whilst they don’t involve any outflow of cash, they serve as a means of obtaining a tax-deduction on your profit which makes them an extremely lucrative mechanism for entities who have incurred capital expenditure to employ. Yet there might be a severely tax-consequential dilemma encompassing directors, particularly in high-growth companies which are burning through cash.
How to pay for non-current assets?
Directors might be willing to personally finance the acquisition of such non-current assets when companies lack the funds to do so. Delaying such expenditure could limit the pace of growth whilst also hindering productivity given the increasingly sophisticated and advanced machinery available which can be the differentiator between market leader and market laggard.
Investing in non-current assets is crucial to leveraging dynamic efficiency whilst maintaining an edge over rivals in an increasingly competitive marketplace and uncertain economical landscape.
However, whilst directors could claim personal tax relief of up to 40%-income tax-rate for high-income individuals-upon doing so, this is in select circumstances and must be carefully weighed up by the director. Directors will only be able to claim CA’s where they can convince HMRC that the piece of equipment is necessary to fulfil their executive function.
E.g. Director A serves as a marketing executive for Company X. She purchases machinery on behalf of the company to be used at its factories and warehouses. Unfortunately, she will be unable to claim the necessary CA relief since the asset isn’t vital to her duties.
Conversely Director B is the sole employee of Company Y which requires new equipment as well. However, B will use the equipment since she is the only employee and thus will utilise the equipment, either for her duty as a director or in performing the intended purpose of the equipment. As a result, B will be able to reclaim CA’s on her purchase of the equipment.
If the cost of the machinery is lower than the annual investment allowance limit of £1 million, companies, directors and employees will be able to reclaim the entirety of the cost of the asset as a tax-deductible charge against profit in the year of purchase.
If not, they can claim 18% via the reducing balance method annually. The decisive differentiator ,however, lies in the fact that the highest rate of tax-relief that companies are permitted to claim up to is 19% but stands at 45% for directors and employees. This can deceptively compel many to fund the acquisition via their personal wealth however the following factors should be borne in mind.
CA’s are also applicable on assets such as motor vehicles with van purchases being 100% tax deductible on cost as well as offering other lucrative tax benefits.
To maintain the wealth of the director, the company will be required to reimburse the director, likely via dividends, to cover the cost of the purchase and this will be taxable. A costly factor at the time of filing the director’s self-assessment returns. Compounding the misery, VAT incurred on the acquisition cannot be reclaimed is the asset is bought by the director but can be if done through the entity, provided it is VAT registered.
Considering the purchase of a non-current asset? Unsure how to optimise your tax-strategy and personal wealth simultaneously? Ring Cheylesmore Accountants to experience our stellar service and be assured of a stress-free journey. Alternatively, you may fill out the quick and simple ‘Contact Us’ form on our website to book a meeting with our ACA qualified partners who can assist you in planning and executing your firm’s objectives.
