Making the most of your allowance

If the year-end is looming, it’s worth thinking carefully about whether there is any equipment you’re planning to purchase, says Chris Harland.

Capital allowances are important to many businesses, as they allow you to deduct the cost of equipment you purchase from your profits over one or more years. As a result, your company ends up paying less tax. And the good news is that most of the equipment you’re likely to purchase will qualify for the scheme.

There are two types of allowance – initial and annual.

The initial allowance is known as the Annual Investment Allowance (AIA), which has a limit of £200k from 1st January 2016, and allows all purchases of equipment to be offset in full against profits. If we go back to the period before that (between April 2014 and the end of December 2015), the limit was £500k.

Special rules apply if your accounting period starts before 1st January 2016. Talk to your accountant or adviser about the purchases that have been made over your financial year to check your eligibility.

If the equipment qualifies for plant and machinery capital allowances, then you should consider making the purchase prior to your financial year end. Depending on when your trading period commenced it might be possible to reduce your taxable profits by up to £200k, depending on the cost of the eligible equipment.

If you have already exceeded the AIA limit, then your purchases will only qualify for the annual writing-down allowance of 18%. When this is the case, it might be worth delaying the purchase until the next accounting period, when the full £200k allowance would be available.
As we’re talking about a key business decision – and there are other factors which may need to be considered – make sure that you have a proper discussion with your adviser before you proceed.