CAPITAL ALLOWANCES - 14.12.2011

Maximising tax relief for the cost of machinery

Reducing allowance

The AIA is a valuable tax break for businesses, offering a deduction on the full cost of equipment for the accounting period in which it is bought. But the AIA limit is being cut from £100,000 to just £25,000 from April 2012. For purchases of equipment, with some exceptions, the cost in excess of the AIA limit will only receive tax relief under the normal capital allowances (CAs) system (see The next step). This will take over ten years just to get a deduction for most of the cost. But with some lateral thinking you can improve on this.

Alternative funding

While there’s no way of avoiding the cut in the AIA, your company can obtain 100% tax relief for equipment for the year of purchase to an almost unlimited value. This is achieved by setting up (or using an existing) specific type of company pension scheme known as a small self-administered scheme, usually just referred to as a SSAS.

Unique advantage

SSASs are popular with small to medium-sized companies and can be run alongside personal or other company pension schemes. The unique advantage of a SSAS is that the regulations allow it to lend money to your company for certain types of expenditure, including the purchase of equipment. There are conditions: (1) the loan must be secured as a first charge on the equipment; (2) it’s no more than 50% of the SSAS fund value; (3) it issubject to interest above the base rate (usually 1% more); and (4) it lasts for no more than five years. This is how it might work in practice:

Example. The four director/shareholders of Acom Ltd want to buy a new piece of machinery costing £55,000. They already have an SSAS and to fund the cost of the machinery the company pays a pension contribution into this for the directors of £15,000 each; £60,000 in total. The SSAS lends Acom £30,000 and it tops this up with £25,000 of other company funds to make the purchase price. Acom can claim the AIA on £25,000, and receive a full tax deduction, not just for the balance of what the machinery cost but for the total £60,000 SSAS contribution. Acom will get an £85,000 tax deduction for the financial year ended March 31 2013. But it gets better.

Tip. The icing on the cake is that Acom can also claim a CAs deduction for the £30,000 cost of the machinery which it funded via the loan. This will, of course, be spread over more ten years, but ultimately it means Acom will receive the tax deduction in full.

Profit extraction

The director/shareholders of Acom will see that to achieve this tax break they’ve benefited from extra contributions to their SSAS pension. That may not concern them, after all it’s their company, but if it does they can balance the books by reducing the regular pension contributions the company makes on their behalf, or even forego some of their other salary etc. It seems to us that this is not only an excellent means of funding the purchase of equipment but also a good way for director/shareholders to extract profit from their company.

For details of the rate of capital allowances, visit http://tax.indicator.co.uk(TX 12.06.03).