From April 2023 Limited companies in the U.K. can claim up to 100% capital allowances on qualifying plant and machinery investments, which includes background plant in commercial property.
This means a business that completes a refurbishment, extension or new build project can write off all costs for qualifying plant in one hit, potentially saving you hundreds of thousands of pounds in tax off the back of your investment.
As a result of measures announced at the spring Budget, incorporated businesses will now benefit from an effective £27 billion corporation tax cut over the next three years as follows:
Full expensing – which offers 100% first-year relief to companies for qualifying new main rate plant and machinery investments until 31 March 2026. Typical main rate items include fire and security systems, data installations, bathroom suites, floor coverings, ironmongery and much more.
The 50% first-year allowance (FYA) for expenditure by companies on new special rate assets until 31 March 2026. Typical special rate items include, electrical and lighting installations, air cooling and heating systems, ventilation installations, lifts and more.
What about small and unincorporated businesses?
In reality the above two types of relief are aimed at larger companies with yearly investment spend exceeding £2,000,000, however if you're a small/unincorporated business owner with investment spend below this figure you can benefit from 100% relief by utilising the AIA.
The Annual Investment Allowance (AIA) provides 100% first-year relief for plant and machinery investments up to £1 million, which is available for all businesses including unincorporated and partnerships. The AIA covers investment in both pools (main rate & special rate) and includes fire and security systems, data installations, bathroom suites, floor coverings, ironmongery, electrical and lighting installations, air cooling and heating systems, ventilation installations, lifts and more.
Example of the tax saved from a £200,000 refurbishment claimed via the AIA:
Total fit-out cost | £200,000 |
Qualifying plant | £145,000 |
Non qualifying/structure | £55,000 |
Total tax relief at basic rate | £29,000 |
"The average capital allowances claim on a refurbishment generally exceeds 60%-70% of the total investment and for small/medium businesses can be claimed at first instances, in full, under the £1 million annual investment allowance.
Already completed a project?
If you have completed a refurbishment, extension or new build project in the last two years, you still have time to access the £1 million AIA and gain 100% relief on qualifying plant from your investment.
Time is not on your side though and if you fail to make a capital allowances claim within two years of the investment you will miss out on the AIA. You will still be able to claim capital allowances but at a much slower rate, as the qualifying plant is written down over many years instead of being written off in full.
The AIA has been around for many years and is nothing new, but it's currently fixed at its highest level in decades and looks set to stay at £1 million for years to come.
Why hasn't your accountant claimed this?
Firstly, it not their fault! One of the reasons for this is that tax legislation surrounding capital allowances are constantly evolving. The government makes changes to the legislation regularly, and it can be challenging for accountants to keep up with all the updates.
In addition, the process of identifying plant that qualifies for capital allowances is complex and requires the accountant to have a thorough understanding of the property and legislation surrounding capital allowances.
Finally, the time and resources required to identify and claim capital allowances can be significant. Accountants are often focused on other aspects of the business's finances, such as compliance, bookkeeping, tax returns and accounts preparation and may not have the necessary resources to make an assessment of the property and any alterations.
A final point to consider....
By not claiming capital allowances on your commercial property refurbishment, extension or new build project, you are potentially losing out on a significant amount of money that you are entitled to off the back of your investment. In fact, failing to claim capital allowances has one result, your business overpaying tax!
You can check if your business qualifies to claim capital allowances by using the link below:
James Nazir Limited