Carl Taylor Accountant and Business Consultant

It’s a common question – when is the right time to invest in capital equipment?  The fact is, it may not be exactly when you think.

Buying capital equipment at the wrong time can cost tens of thousands of pounds in lost or delayed tax deductions.  If you get it right, you’ll save a significant amount of tax, so it really is worth getting the timing right.

There’s a key tax change on the horizon at the end of 2020 which means its even more critical than ever to think carefully about when capital expenditure (capex) is done.

Getting a 100% tax deduction for capital spend

The Annual Investment Allowance (AIA) allows businesses a 100% allowance for qualifying capital spend up to a specified annual amount each year.

The current limit is £1m per year, until 31st December 2020, and this is a great provision for manufacturing, distribution and import businesses, which typically require significant investment in machinery, racking and IT equipment on a regular basis.

The big change is that this annual allowance is reducing to £200,000 from 1st January 2021.

What qualifies for AIA?

You can claim annual investment allowance on most items of plant and machinery, for example:

What’s the deadline?

If you have a financial year end early in the year (for example 31st March), then you need to think very carefully about the timing of your capex.

For example, if you have a March 2021 year end, the maximum AIA available is as below:

For the period 1st April 20 – 31st December 20: £1m / 12 x 9 months = £750,000
For the period 1st Jan 21 – 31st March 21: £200,000 / 12 x 3 months = £50,000

You can see from this example that the catch really comes in the early part of 2021.  If you purchased a machine for £300k on 15th January, you would only be able to claim £50,000 AIA, and the remaining £250,000 would get a much slower tax deduction.

If you’d purchased the machine a month earlier, on 15th December, then you would be able to claim AIA on the whole purchase, saving around £40,000 of corporation tax in the year.

What action do I need to take?

If you have a year end in the early part of the year, the key action here is to assess your capital expenditure needs, and try and pull it into 2020 if you can, to ensure you get the best tax deduction possible.

To make sure you’re taking full advantage of the higher level Annual Investment Allowance, ensure you speak to your accountant or advisor to get the timing of your purchases right to maximise the available tax savings.