Accelerate tax relief for plant and machinery

Capital allowances

As you probably know, businesses are entitled to tax deductions for the cost of plant and machinery, (equipment) as capital allowances (CAs). If the annual investment allowance (AIA) or first year allowances (FYAs) apply, CAs provide speedy tax relief but if neither is allowed the relief is spread over many years.

Where you can’t make use of the AIA or FYAs, making a short-life asset election can reduce the time it takes to get full tax relief for the cost of equipment to between one and eight years. As a rule of thumb, an election isn’t worthwhile if you can claim the AIA or FYAs instead.

Example with no election. Acom Ltd spends £35,000 on 30 new PCs for its employees. It buys them from Bcom, a sister company, and therefore it cannot use its AIA to claim CAs. Acom includes the cost in its main pool of capital expenditure and claims CAs at 18% per year. It will take 16 years for Acom to receive tax relief for most of the cost (95%) of the computers.

Example with election. The facts are the same as the previous example except that Acom makes a short-life asset election for the PCs. After six years it scraps and replaces the computers. It gets the same 18% CAs to start with but for year six it can claim a deduction for the remainder of the £35,000. That means it receives around £10,000 of tax deductions ten years earlier than if no election had been made.

An election can be made for any type of equipment unless it’s specifically excluded by legislation, even if you’re unsure if your business will own and use it after the eight years are up.

Simplify by grouping assets

Normally an election can only be made if the assets it applies to are individually identified. That sounds OK in theory but in practice expenditure on relatively low cost equipment like office chairs, window blinds and hand tools can be difficult to keep track of. This is where you can make use of a little known HMRC concession. It says that if you can’t identify specific assets, or if identification is impractical, you can treat all similar assets as if they were one. This simplifies your record keeping but begs the question, how can you obtain accelerated CAs for grouped assets?

Practical issues

The advantage to a short-life asset election relies on you identifying when equipment ceases to be used within eight years of its purchase. But if you’ve used HMRC’s grouping concession you won’t record this information. This seems to nullify the advantage to the election. To prevent this you could make a stock check each year, compare the number of items in use and, taking account of new items bought in the year, work out how many were scrapped or sold. But there’s a simpler alternative.

Another HMRC concession allows you to estimate the expected life of grouped assets and to assume a proportion of them will cease to be used (scrapped) each year and so claim accelerated CAS accordingly