Will buying equipment save me tax?
Buying equipment for your business normally involves a large investment. If you are buying a new computer or office equipment such as desks, table and chairs you have to plan and be sure that you can afford the investment that you are making.
When you do make this investment there are tax reliefs that you can claim which will help you save tax and make the investment easier. The reliefs are called depreciation in your accounts and capital allowances when we do them in the corporation tax return.
Both of these come with slightly different rules. Depreciation is how we show this expense in the accounts. But depreciation is not allowed when we do the calculation that you pay tax on. So when we do this we add back the depreciation and deduct a different amount for capital allowances.
The rules for capital allowances can be slightly more favourable than depreciation. Capital allowances will for the moment come with three different rates 18%, 100% and the new super-deduction at 130%.
Depreciation is charged to the accounts
When you buy a piece of equipment we have to record it in your accounts, it is an asset that the business has and we need to show it. We do that in the balance sheet of the accounts, it is shown as an asset. It is some thing that the business that will last and is worth money.
We then transfer a share of that to the profit and loss account each year. We do that so that profit is reduced over the time that you expect to have the equipment.
If you expect the computer to last five years we would split the cost in to fifths and transfer that amount to the profit and loss each year and reduce the value of the asset in the balance sheet by the same amount.
The equipment would be in the balance sheet in the accounts until it is all used up. The easiest to understand this is to imagine a cake. When you buy a piece of equipment for your business it is like buying a cake. If you expect it to last five years, we cut the cake in to fifths.
Each year we move a slice of the cake from the balance sheet on to the profit and loss accounts. This reduces the amount of cake on the balance sheet and the profit is also reduced by the amount of cake that is transferred to it.
Capital allowances
Depreciation is not allowed for the calculations of profit for taxes, but capital allowances are used instead. So we add back the depreciation to the profit and deduct the capital allowances. Capital allowances work similar to depreciation but with different amounts that can be claimed.
The main rate for capital allowance is 18%. That is each year you would take a slice equal to 18%, then the next year you would take 18% of what is left. The amount will stay there until it is all used up or the equipment is sold or scrapped.
If you had profit of £10000 and bought a computer for £1000. The capital allowance would be £1000 x 18% = £180. The profit calculation would be £10000 -£180 = £9820 x 19% tax = £1895.26 tax due. A saving of £4.74 in tax or 4.74% of the value of the computer.
If the asset is sold for more than the amount that is left for equipment we raise a balancing charge, that is the difference between the sale price and the amount still left for capital allowances. If the asset is sold for less or scrapped we make a similar adjustment called a balancing allowance.
Annual Investment Allowance
The annual investment allowance is an increased capital allowance that companies can claim. Rather than claiming the capital allowance at 18%, it can be claimed for 100% of the equipment cost.
There is a limit of £1m that can be claimed as an annual investment allowance from January 2021 to January 2022. After that the amount that can be claimed reduces to £200k per year.
With the cake example that we have that means that if you spend £1m or £200k depending on the allowance that is available. All the cake can be used in one year to reduce the profits on your company.
If you have a profit of £10000 and bought a computer for £1000. The profit calculation would be £10000 - £1000 = £9000 x 19% = £1710. A saving of £190 or 19% of the value of the computer.
The Super Deduction
The super deduction is a special capital allowance that is available for companies to use between the 1st of April 2021 and March 31st 2023. The super deduction gives you an extra 30% on top of the value of the equipment that you buy. This means that you will get an extra slice of cake when you buy a piece of equipment.
In money terms what this means is that if you buy a computer for £1000. A further £300 is added as a super deduction. Meaning that £1300 is deducted from your profit before we start to charge tax.
If your profit is £10000. You will get a super deduction of £1300 and at the tax rate of 19% the tax paid is £10000 - £1300 = £8700 x 19% = £1653. That is a saving of £247 in tax, almost 25% of the value of the computer that you bought.
Conclusion
The more increased capital allowances – annual investment allowance and the super deduction give a far greater incentive for a company to invest in equipment. With the tax savings of 19% and 25% of the value spent on the equipment. At these rates there certainly is a reason for companies to invest and spend on equipment particularly before the end of March 2023 whilst the super deduction is still available.
Next Steps
The decision to make and investment in your business is a complex one and involves just more than what capital allowances and tax reliefs that are available. You will need to be sure that the business can afford to pay for the equipment and investment that you are making.
It is essential to look at your cashflows to make sure that you can afford the investment and that you have a budget to work with.
If you need any advice deciding to invest, if you can afford it or the tax reliefs that you can claim once you have invested please arrange a call below and we can discuss what your options are.