Tax planning for equipment purchases

AIA and full expensing

The annual investment allowance (AIA) entitles businesses up to £1 millon of tax relief (capital allowances (CAs)) for purchases of plant and machinery (equipment), with a few exceptions. On top of this, businesses operating through companies qualify for relief on similar terms to the AIA on all purchases of new and unused equipment until April 2026 . You might therefore think the timing of equipment purchases is largely irrelevant as far as tax relief is concerned, but there’s a catch.

Hire purchase

A special rule applies where payment for equipment is spread under an HP agreement. It means your business isn’t entitled to CAs until the equipment has been brought into use in the business. For example, if your business signs an HP agreement for equipment in one financial year but it isn’t used until the next, CAs are delayed until the later year.

Other delayed payment arrangements

A delay in CAs also can occur where you commit to a purchase but payment isn’t made immediately.

Trap. Where the purchase agreement allows for all or part of the cost to be paid later than four months after the purchase becomes unconditional, i.e. the date you’re contractually committed to go through with the purchase, CAs can only be claimed for the financial year in which payments for the equipment are made.

Example. Acom’s accounting year end is 31 December. On 1 December 2023 it commits to buying new machinery for £100,000. The purchase contract requires Acom to pay £15,000 at the time of the order and the balance within 30 days of when the machinery is installed. The installation is completed on 30 April 2024. Acom can claim CAs of £15,000 in its financial year to 31 December 2023 but isn’t entitled to CAs on the balance of the cost until the following financial year, thus delaying tax relief by a year.

When agreeing terms for large purchases of equipment near the end of a financial year, keep in mind the four-month rule. If the timing of the payment is going to cause CAs to be delayed to the next financial year, ask the supplier to advance the payment so it’s within four months. Even if you actually make payment later than this, CAs can be claimed in the financial period in which the purchase contract is signed.

If this isn’t possible, avoid making this type of purchase close to your financial year end.

Purchase planning

The message is that planning your equipment purchases around the tax rules is important. It can mean a difference to when your business obtains tax relief of almost a year. Planning can ensure you receive the tax relief sooner and therefore also improve your cash flow.