You bought used machinery from another trader who agreed to accept payment over six months. Most of the cost falls into your next financial year, but as you’re already using the machinery can you claim the tax deduction now?
As you probably know, capital allowances (CAs) are the deductions HMRC allows instead of the depreciation charges included in your accounts for machinery and other assets owned by your business. Unlike depreciation, which is calculated using logical accounting rules, CAs are worked out using tax rules which include tricky issues regarding the timing of tax relief where you don’t pay for machinery etc. all at once. Understanding these can help you time your purchases to gain tax relief sooner rather than later.
Deferred payment shouldn’t be confused with hire purchase or leasing arrangements. These types of contract mean you don’t own the machinery etc., at least not until you’ve paid a number of instalments, and there are special CAs rules which apply.
You must own the machinery etc. and use it for your business to be entitled to CAs. For example, if your business bought and owned a TV which is entirely for private use, there’s no entitlement to CAs even though your business accounts would include a charge for depreciation. Note – If a company owns an asset solely for private use by an employee, this counts as business use as it’s being used to reward an employee instead of salary. The company is entitled to CAs.
The timing of payment doesn’t usually affect when you’re entitled to CAs. The trigger point for CAs isn’t the date you pay but when you become unconditionally obliged to pay.
Example – On 31 March 2019 Acom Ltd bought a new cutting tool. It charges this to its account with the supplier which it settles on 28 April. Acom’s financial year ends on 31 March. It can claim CAs for the new machinery in its accounts to 31 March 2019 (not the year ended 31 March 2020).
Tip – When planning purchases remember the rule which determines when CAs are triggered, i.e. when you become “unconditionally obliged” to pay for the goods. If in the example Acom had deferred the purchase until 1 April it would have had to wait another full year to claim CAs.
Trap – Where payment is due more than four months after purchase, a special rule applies. Entitlement to CAs is split.
Example – On 1 February 2019 Acom (from our previous example) signed an agreement to buy a second-hand truck for £18,000. It agrees payment in six equal instalments: one on delivery and the remainder on the first of each of the next five months. Acom can claim CAs in its 2019 accounts for £12,000 and the other £6,000 in its accounts to 31 March 2020. Tip – Although the entitlement to CAs fall into two different financial periods the annual investment allowance (AIA) can apply to both.