Businesses can presently opt to claim a tax deduction against profit instead of claiming capital allowances when plant and machinery are replaced. HMRC has said this practice will end. Will your business be worse off?
Extra statutory concessions review The courts have forced HMRC to look again at their informal tax concessions ("extra statutory concessions"). HMRC have announced that the renewals allowance for plant and machinery will end on 31 March 2013 for companies and 5 April 2013 for individuals.
(Details of the existing concession can be found here .)
What's been scrapped? Tax deductions for the cost of replacing or altering tools used in a trade are not affected. These are allowed by law. It is the extension of this rule to plant and machinery that's going. Tools, plant and machinery have no specific legal definition but bear their ordinary meaning in common English usage.
Repairs..In Replacements....Out Wilf has some machinery (not a tool) in need of repair. Will he still get a tax deduction for the cost when the renewals allowance goes? Yes: because the concession going only affects the replacement of machinery and not repairs to it.
TRAP If the plant and machinery is fixed to a building (forming so-called integral features), special rules apply. These say that if the repairs cost more than half of the original cost of the item, you can only claim capital allowances (CAs) and cannot treat the cost as an expense in your profit and loss account.
(More details of integral features can be found here .)
Replacement machinery Most businesses don't use the renewals concession for the cost of machinery but claim CAs instead - HMRC's version of depreciation.
Up to 31 March 2012, you can claim a maximum of £100,000 of the cost of machinery for an accounting year. (This limit drops to £25,000 for periods beginning on or after 1 April, 2012)
CAs on expenditure above these limits are spread over ten or more years.
Where renewals allowance is claimed, you get tax relief sooner because the cost of a similar replacement (but not the first purchase) is claimed in full as a business expense against your profits for the accounting year in which you buy the replacement.
TIP In the end both renewals allowance and CAs produce the same tax deduction - the difference being in the timing. The loss of renewals allowance won't increase most business' tax bill (with the exception below). If you are claiming renewals, switch to claiming CAs for future plant and machinery purchases.
TRAP No CA claim is possible on equipment (fridge, cooker etc.) used in let residential accommodation.
Individuals instead can claim a wear and tear allowance of 10% of the ‘net rent’ . (For more details click here .)
Wear and tear allowance is not, however, available to companies so they will lose out when the renewals concession ends.
A blog providing UK tax information and planning ideas from John Pointon, Accountant, Business and Tax Consultant. Please send any suggestions for topics you would like to see covered to me at jpointon@gmail.com or 34 Lightley Court, Sandbach, Cheshire, CW11 4QA or phone 01270 763 466.
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