When you buy assets and keep them for use in your business, you don’t necessarily get tax relief immediately. In your accounts, these are recognised in the balance sheet as fixed assets analysed by asset type e.g. motor vehicles. This is in contrast to when you purchase a consumable item, such a printer cartridges, or stock sold to your customers, which go to your profit & loss account. The gradual reduction over time in the value of your fixed assets is accounted for using a depreciation charge which reduces your accounting profit.
Whilst depreciation policies have to comply with accepted guidelines, it is at the discretion of each business to determine how to estimate the reduction in an asset’s value through the accounts. For this reason, depreciation is ignored when it comes to preparing a tax computation and replaced by capital allowances. Relief has to be applied consistently for all taxpayers and this is achieved by a complex set of rules set out in the Capital Allowances Act 2001.
The aim of this article is not to take you on a whistle-stop tour of such fascinating topics as integral features, the treatment of a motorised openings vs windows, or which assets go into the main, special or single-asset pools. There are however two developments in the next 12 months which are universally important – the Annual Investment Allowance and changes to allowances for cars.
The Annual Investment Allowance (AIA) is the financial value of assets for which a business will receive 100% tax relief in the year they are bought. It changes from year to year, announced via the Budget and enshrined in law via the Finance Act. Generally the AIA does not change without plenty of notice (although this did happen recently, catching out a lot of businesses) but it can change in the middle of a tax year, as will be the case in January 2021. For anyone who wonders how the Treasury decides what the AIA should be – it’s partly tax, partly economics, and a fair bit political. HMRC has to collect tax to pay for public services. The Chancellor has to get businesses spending the right amount of money to manage the economy and inflation. The Government wants to persuade business owners to vote for them or to show the public that they are supporting big business/small business/the man-in-the-street (delete as appropriate).
The current AIA is £1 million but this will drop back down to £200,000 on 1 January 2021. At first sight, this would have little impact on most businesses. Whilst this is generally correct, businesses with accounting periods that don’t run with the calendar year, those with accounting periods less than 12 months long, or those considering spending more than £16,667 on fixed assets should plan ahead as the timing of the expenditure could make a big difference to the tax relief available.
Cars (without doubt the most interesting area of capital allowances for SMEs) are not eligible for AIA. Cars go into a ‘pool’ depending on their CO2 emissions figure, according to their state (new vs used) and when they were purchased. The pool determines whether they receive 100% First Year Allowance (FYA), 18% main rate or 6% special rate tax relief.
The emissions boundaries for cars purchased since April 2018 are staged at 50 g/km and 110 g/km. This means that vehicles with a CO2 emission figure of less than 50 g/km will currently receive a 100% capital allowance, those between 50 and 110 g/km receive 18% and the rest are left with a measly 6%. From 1 April 2021, there will be a sliding across of the rates and reliefs. Vehicles purchased after 31 March 2021 must have 0 g/km output to qualify for FYAs, those with a figure below 50 g/km will then get an 18% allowance, and anything over 50 g/km moves into the 6% banding. For businesses planning on replacing cars in the next 12 months, the timing of this could be crucial to their tax bills.
For example, the capital allowance on an entry level Toyota Prius with a CO2 emission figure of circa 107 g/km and an R.R.P. of £29,325 will decrease from £5,278 to £1,759.
Or, even more drastically, a BMW 330e Plug-in Hybrid PHEV with a CO2 output of 32 g/km with an R.R.P. of £37,875 will see the capital allowance plummet from £37,875 to £6,817.
If you are the proud owner of a shiny new BMW and you trade via a limited company, this means a difference in the company’s tax bill of £5,900. For a sole trader who pays tax at the higher rate of 40%, the difference would be in the region of £12,423*.
It is also vital to remember that while the rates for pools will change on 1 April for companies and 6 April for unincorporated businesses, the FYA rate applies from 1 April for ALL businesses.
If you are considering a new business car in the next 12 months, there is a lot more to think about than trims and alloys. We would be very happy to talk through your options and advise you on the tax considerations.
* assuming no personal use of the car